Prices Paid And Prices Received Diffusion Indices

Each month the Philadelphia Fed releases the Business Outlook Survey, which contains a variety of information concerning business conditions.

As seen on the site:

The Business Outlook Survey is a monthly survey of manufacturers in the Third Federal Reserve District. Participants indicate the direction of change in overall business activity and in the various measures of activity at their plants: employment, working hours, new and unfilled orders, shipments, inventories, delivery times, prices paid, and prices received. The survey has been conducted each month since May 1968.

One component of this survey are diffusion indices for both “Prices Paid” and “Prices Received.” (for those unaware, this survey provides the following definition:  ”Diffusion indexes represent the percentage indicating an increase minus the percentage indicating a decrease.”)

Doug Short provides a monthly blog post concerning the Philadelphia Fed’s Business Outlook Survey.  For reference purposes, here is a chart he has created that shows, from a long-term perspective, the “Prices Paid” and “Prices Received” diffusion indices (shown by the dots) and their 12-month moving averages (shown by the solid lines) from the November 2013 report :

(click on chart to enlarge image)

Dshort 11-21-13 Philly-Fed-PPC-and-PRC-12MA

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StratX, LLC offers the above commentary for informational purposes only, and does not necessarily agree with all (or any) of the views expressed by these outside parties.

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ProfitabilityIssues.com is published by StratX, LLC (stratxllc.com).  StratX, LLC is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and given these conditions, offers corporations and businesses advice, strategies, and actionable methods on how to optimally increase revenues and profitability.

Comments Concerning Price Wars

Recent posts, including “Price Discounting Issues” and “Price Discounting Issues In The Upcoming Holiday Season,” have discussed the recent increase in overall price discounting activity.  Now, the discounting seems reading to erupt into a “price war” in consumer electronics.

Excerpts from the November 20, 2013 Wall Street Journal article titled “Price War Looms For Electronics” :

Best Buy Co. shares plunged 11% Tuesday, after the electronics chain warned investors that it was prepared to sharply cut prices—even at the risk of its profit margins—to keep up with competitors that are aggressively discounting to win market share. Chief among those rivals is Wal-Mart Stores Inc., which last week stated bluntly that it will turn to even more price cuts to boost its stagnant sales.

also:

Once a highly profitable sector, consumer electronics is extremely competitive and vulnerable to increasingly frugal consumers. The pressure has worsened this year, because Americans appear to be plowing much of their budgets into new cars and upgrades to their homes, even as overall consumer spending remains tepid.

also:

The paucity of overall growth in spending means retailers are locked in a battle for market share. And in electronics, where the products are the same from store to store, the one real competitive weapon is price.

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“Price wars” can be a complex topic, albeit one that will almost certainly become more prominent given various economic and business conditions, including anemic growth in consumer incomes, continuing “deflationary pressures,” and intensifying price competition.  It appears as if in many situations, price-cutting and discounting are increasingly used rather indiscriminately.

While generalizations concerning “price wars” and other price-cutting actions are inadvisable – as pricing-related characteristics vary among companies and industries – in many instances, avoiding “price wars” is paramount.  Key actions to avoid a “price war” scenario include the ability to foresee and anticipate the dynamics of such a scenario, and then being able to execute appropriate sales, marketing, and pricing actions.

While some companies can be (very) successful at lower price points, such success demands a certain set of skills and disciplines that are often elusive.  Being, or becoming, a successful low-cost producer (or retailer) is often difficult.

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ProfitabilityIssues.com is published by StratX, LLC (stratxllc.com).  StratX, LLC is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and given these conditions, offers corporations and businesses advice, strategies, and actionable methods on how to optimally increase revenues and profitability.

Price Discounting In The Upcoming Holiday Season

In a Wall Street Journal article of November 15, 2013 titled “Shoppers Can’t Shake Blues,” trends in retail sales and price discounting are discussed, particularly with regard to the upcoming holiday shopping season.

Three notable excerpts include:

“No one is expecting the pie to grow rapidly, so the question is how do you get a bigger slice of it,” said economist Sung Won Sohn, who also serves on the board of teen retailer Forever 21 Inc.. “We’re going to see an unprecedented degree of promotions this holiday season.”

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Sluggish demand through the fall has prompted retailers to turbocharge promotions with hopes of attracting shoppers away from competitors.

also:

The holiday shopping period “is going to be about as competitive of a market as we’ve ever seen,” Wal-Mart U.S. Chief Executive Bill Simon said. “Incomes are going down, while food costs, gas and energy prices—while abating—are still eating up a big piece of customer budgets.”

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The above excerpts illustrate the intensifying price competition among retailers.  Given a variety of economic and business dynamics, price discounting is a topic that will continue to gain prominence.  As mentioned in the November 6, 2013 post, titled “Price Discounting Issues” :

Price discounting can be a complex subject, albeit one that will gain in prominence given a variety of economic dynamics, including anemic growth in incomes, continuing “deflationary pressures,” and increasing price competition.

While generalizations concerning price discounting are inadvisable, as pricing-related characteristics vary among companies and industries, it is important to realize the benefits and detriments of discounting, as well as its longer-term pricing and strategic issues.  As stated in the “Price Discounting Issues” post mentioned above:

However, given the various economic dynamics mentioned above, as well as the continuing price pressures seen in many industries, these price discounting issues should at least be considered, if not actively acted upon, if they are not already being fully addressed.

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ProfitabilityIssues.com is published by StratX, LLC (stratxllc.com).  StratX, LLC is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and given these conditions, offers corporations and businesses advice, strategies, and actionable methods on how to optimally increase revenues and profitability.

Business Expectations Concerning Unit Costs, Price Changes And Year-Ahead Sales

The Atlanta Federal Reserve publishes a monthly report titled “Business Inflation Expectations” (BIE) that contains statistics from a survey of regional businesses’ views on various factors that impact profitability.  These factors include unit costs, unit cost expectations, sales levels, profit margins, and other factors.

As described on the site:

Approximately 300 panelists receive the survey each month. Panelists represent businesses of various sizes headquartered within the Sixth District, which encompasses Alabama, Florida, Georgia, and sections of Louisiana, Mississippi, and Tennessee. Panelists range from executives of large corporations to owner-operators of small businesses. The industry composition of the panel roughly reflects the makeup of the national economy. Nevertheless, survey responses are weighted by industry shares of national gross domestic product.

An excerpt from the November 2013 BIE Survey (pdf) dated November 14, 2013 (involving 207 firms responding) :

Respondents indicated that, on average, they expect unit costs to rise 1.9 percent over the next 12 months. Inflation uncertainty was virtually unchanged at 2.3 percent in November. Firms also report that, compared to this time last year, their unit costs are up 1.6 percent. Sales levels were relatively unchanged in November, with roughly 44 percent of respondents saying their current sales levels are at or above normal compared to 46 percent in October. Profit margins also were unchanged, with only 41 percent of respondents indicating their profit margins are at or above normal.

This month’s “quarterly question” concerned factors influencing price change.   As seen in the report:

Sixty-five percent of respondents expect labor costs to put moderate or strong upward pressure on their prices over the next 12 months, a relatively large share of responses that has trended slightly upward. Respondents’ expectations regarding the upward influence of non-labor costs on prices over the next 12 months have lessened, and at 66 percent they are now roughly equal to expectations for the upward influence of labor costs. Thirty-nine percent of respondents expect sales levels to put moderate or strong upward pressure on prices in the year ahead, a measure that has increased since May.

Furthermore, the “special question” asked respondents about their expectations for year-ahead unit sales growth.

The report also includes a variety of charts depicting respondents’ answers.

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StratX, LLC offers the above commentary for informational purposes only, and does not necessarily agree with all (or any) of the views expressed by these outside parties.

—–

ProfitabilityIssues.com is published by StratX, LLC (stratxllc.com).  StratX, LLC is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and given these conditions, offers corporations and businesses advice, strategies, and actionable methods on how to optimally increase revenues and profitability.

Price Discounting Issues

Price discounting can be a complex subject, albeit one that will gain in prominence given a variety of economic dynamics, including anemic growth in incomes, continuing “deflationary pressures,” and increasing price competition.

Recently there have been two notable articles regarding discounting.  The first is an October 30, 2013 article from Huffington Post titled “Restaurants’ Deals, Discounts Surge.”  The next is a November 1, 2013 Wall Street Journal article titled “GM Tries to Curb Discounting.”

Three excerpts from the Wall Street Journal article concerning GM:

“We don’t have to put our truck on sale to sell it,” Chevrolet Global Brand Chief Alan Batey said in an interview on Thursday. “Whether we lose a couple of points of market share in a given month because someone is liquidating isn’t our concern. We aren’t going to get into that dogfight.”

also:

Getting a premium price for its new pickup trucks is critical to Chief Executive Dan Akerson‘s overall plan to lift GM’s profit margins. He wants the company to achieve 10% operating margin by mid-decade, putting it on par with Ford.

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GM’s Mr. Batey contends Ford is only pulling ahead its own sales and not taking sales from Silverado and Sierra. Ford officials declined to comment on GM’s pricing strategy.

The article also contains a graphical representation of pickup truck discounts since 2006.

The Wall Street Journal article mentioned above vividly illustrates various notable issues concerning price discounting.  They include:

  • The difficulty of “escaping” discounting in an industry in which price discounting has been prevalent
  • The question of whether discounting “pulls sales ahead”
  • The recurring “margin” vs. “market share” conundrum
  • Whether wanting to increase operating margin is – or should be – the primary determinant in whether to discount
  • Is discounting really needed, or are there other actions or sales methods that can be deployed to offset the pressure to discount?

Other issues that are relevant in today’s price-competitive environments include:

  • Is price discounting “worth the money” – or is it in effect “giving money away”?
  • What preconditions should exist if a company hopes to successfully employ discounting?
  • Is the overall pricing situation changing in the industry, or will it in the near future?
  • Even in markets in which price pressures are high, are there opportunities to increase (at least some) prices?

Of course, these issues should be handled on a per-company basis, and as such generalizations are inadvisable.  However, given the various economic dynamics mentioned above, as well as the continuing price pressures seen in many industries, these price discounting issues should at least be considered, if not actively acted upon, if they are not already being fully addressed.

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ProfitabilityIssues.com is published by StratX, LLC (stratxllc.com).  StratX, LLC is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and given these conditions, offers corporations and businesses advice, strategies, and actionable methods on how to optimally increase revenues and profitability.