Chief Pricing Officer

At last week’s SIGNALS 2008, SignalDemand’s annual executive summit, I was honored to participate in discussions and listen to presentations from renowned economists, pricing experts and senior manufacturing executives on the theme of “Forecasting the Future.”

The event was a reality check in terms of what the manufacturing industry is facing - a tightening squeeze due to continuing input cost volatility and, now, an economic crisis that weighs on both ends of the industry: pressure on the production side and shifting demand on the consumer side. But, SIGNALS also offered expert words of wisdom and practical advice on the importance of price strategy to help manufacturers not only survive, but actually thrive in these times.

Some highlights from SIGNALS:

• Dan Ariely, Ph.D. and Duke University professor, shared his astute observations on negotiations and our own weaknesses (more on this in future CPO posts).
• Gary Ray, president of Hormel, highlighted the importance of forecasting and price strategy at Hormel Foods.
• CPO panel: Pricing experts Bill Chandler from Cargill and Scott Newman from Ventura, demonstrated how they have truly elevated the pricing function within their organizations.
• Tom Elam, Ph.D. and president of FarmEcon, an agricultural and food industry consulting firm, presented impressive research on the changing linkages between food and fuel.

Bottom line: If you deal with price strategy in manufacturing, SIGNALS is a must-attend event.

Need more proof that pricing is more important than ever? Well, how about this headline from the Associated Press: “Food Prices Remain Stuck at High Levels.”

The American Farm Bureau Federation (AFBF) released its quarterly survey of retail food prices and found that even though gas prices and other costs of production may have dropped slightly, manufacturers are still feeling the pinch of rising production costs. Of the 16 items surveyed in the study, 11 went up in price, while only five went down. The overall price increase for these 16 items was 10.5 percent. Among the products that went up: pork chops, sirloin tip, ground chuck, cheese, apples and potatoes. The reason?

“We continue to see increases in several staple food items due primarily to the long-term effects of high energy prices in the food sector. Sustained high costs for processing, hauling and refrigerating food products are reverberating at the retail level,” said Jim Sartwelle, an AFBF economist.

Regarding the top gainer in this quarter’s survey, Sartwelle explained, “Acreage planted to potatoes was down nearly 8 percent this year. The combination of a smaller crop and some production losses in the field has led to higher-priced spuds in the produce aisle.”

The reality for food producers is that price spikes are here to stay - at least for the foreseeable future. So, what to do? Producers and manufacturers need to find a balance between maintaining profits without passing too many costs off to consumers. With proper insight into prices across channels, customers and product lines, producers should be able to make smart decisions about where margins can be maximized and where demand can be shaped with price in order to drive profitability without across-the-board price increases.

Reuters’ veteran commodities reporter Bob Burgdorfer published a profile of SignalDemand yesterday establishing them as the only company offering a margin optimization solution to the food and meat industries on a large scale. The article was titled “Food Price Volatility Helps SignalDemand” - here is an excerpt:

“…SignalDemand’s software uses algorithms and econometric modeling, allowing customers to input the cost of ingredients such as corn, wheat, or soybean oil, to determine how much to charge for finished products.

Companies  can also calculate how high or low their prices need to be in the future, because sales contracts to restaurants and other food service customers are often for a one-year period.

‘The tremendous volatility is making people nervous about long-term contracts,’ said [Mike] Neal, [CEO of SignalDemand]…”

Commodity markets swinging high and low, combined with the global economic downturn means that manufacturers can’t afford to not be on their toes. Manufacturers need highly accurate forecasts to give them confidence to commit to long-term contracts.

Lucky for them, SignalDemand is up to the task - ready and able to help manufacturers compete in a tight market. (Disclaimer: I am a board advisor for SignalDemand)

Everyone agrees that pricing decisions shouldn’t be made lightly, especially given the clear evidence that price has a significant and immediate impact on profits. Also, the consequences of pricing decisions affect the entire business process flow - pricing influences demand, which impacts production and purchasing requirements. So who is the Chief Pricing Officer? Who has the power to determine price strategy and execute on it?

In reality, it’s not just one person.

Here’s what happens at any given company where products are made and deals are negotiated to sell those products:

• A team of pricing experts do number crunching for a particular product, often using myriad spreadsheets
• Executives might weigh in when it comes to strategic initiatives like category management
• Marketing or sales generates a price list to hand out to sales representatives
• Sales reps line up deals at the best prices they can negotiate
• At smart companies, there is a person or team dedicated to analyzing prices secured across products, channels and customers

Depending on the size of the company, the number of people influencing the pricing across a company’s product portfolio could range into the thousands. But, what does this mean? Well, given the impact that price can make on a company’s bottom line, every single person involved in pricing and selling should be considered a CPO.

Without a central source of knowledge, that small army of CPOs could have a disparate, sometimes contradictory, and ultimately adverse affect on overall price strategy - and subsequently, on company profitability.

What if each CPO used the same accurate information and application as a baseline for decision-making? Who is the CPO in your organization?

I look forward to your comments.

So, we talk a lot here about food prices and what they mean to manufacturers and the folks at the start of the supply chain. But what about the folks at the other end, like you and me? As most people know first hand, food prices can be one of the biggest drains on families’ budgets – the bigger the family, the bigger the drain, and the lower a family’s income, the bigger bite food takes out of the monthly budget.

The United Nations’ Food and Agriculture Organization estimated that international food prices are up more than 60 percent since 2006, including a staggering climb during the first three months of 2008. Beyond the obvious bad news, other economic dangers stem from high food prices – a reverse “trickle-down” effect. Food and housing are a family’s two basic costs, expenses that cannot be forgone or significantly trimmed back – everyone needs to eat and needs a roof over their head. As those costs increase, consumers stop discretionary spending: restaurant visits slow down, people stop buying big ticket items, and generally stop spending money. Those at the bottom of the economic ladder also need more support, providing further strain.

Food prices are all encompassing, affecting broad swaths of the public and creating depressed conditions at the very base of the economy – consumers. Combine this with extreme pressure from the financial markets, and the country’s economy is squeezed from almost every angle.

This is a very simple illustration of why food producers need to intelligently determine prices. Smart prices throughout the supply chain benefit everyone in the long run.