Chief Pricing Officer

This blog has covered a lot of ground over the last eight months, from economics jokes to retail and wholesale pricing concerns, from the meat industry to the president’s inaugural address.

Though there’s a little something for everyone in the pricing field on the CPO blog, at its core it is dedicated to the issues touching the manufacturing pricer, strategist, executive.

Today’s post offers a handful of articles that create a sobering retrospective. My hope is that by acknowledging reality and embracing the means to a solution, the headline in 2010 will be a banner proclamation that the manufacturing industry has not only survived, but transformed itself into a model industry of transparency and intelligent business.

2009
The Collapse of Manufacturing
Economist
http://www.economist.com/opinion/displaystory.cfm?story_id=13144864

“The destructive global power of the financial crisis became clear last year. The immenisty of the manufacturing crisis is still sinking in, largely because it is seen in national terms - indeed, often nationalistic ones. In fact manufacturing is also caught up in a global whirlwind…

2007
For Manufacturing, a Recession Has Arrived
New York Times
http://www.nytimes.com/2007/02/28/business/28leonhardt-web.html?_r=1&scp=5&sq=manufacturing&st=cse

“Is the entire United States economy in danger of going the way of the manufacturing sector? Is it possible that we’re headed for a real recession?”

The manufacturing industry has a chance to reinvent itself and our hope lies in transparency. Transparency of price is a powerful point to start the ripple effect that will change the entire conversation throughout the supply chain -  and the economy. From another recent Economist article, this one on the finance industry, we are offered a truth that should be equally applied to all industries:

“When information is relevant, standardised and public, it fosters intelligent decision-making.”
Economist
February 21, 2009
http://www.economist.com/finance/displaystory.cfm?story_id=13144773

To me, that sentiment gives hope for the possibilities yet to be fully realized in manufacturing industry.

The market for turkeys is somewhat of an odd duck – demand is wholly seasonal and competition is fierce. And price is typically the main lever to compete. According to the American Farm Bureau, turkey prices have gone up in the past year – but not a whole lot.

Still, the AFB still said that the average price of a Thanksgiving dinner, when adjusted for inflation, is still less than it was in 1988. That adds up to an unhappy situation for some food manufacturers.

With higher costs for key ingredients such as corn, soybeans and oil, turkey processors are under pressure and have to plan a year in advance for the one day a year they count on most.

Some 46 million turkeys will be eaten on Thanksgiving Day, about the same as in previous years, said Sherrie Rosenblatt, spokeswoman for the National Turkey Federation.

“That’s basically most Americans having turkey at the center of their plate,” she said.

Consumers will see good prices this year, Rosenblatt said, because retailers will again heavily advertise turkey at low prices in the hopes that shoppers drawn in by lower turkey price will buy lots of other products.

Turkey sales are an interesting case study in pricing because demand is so seasonal. How do you sell more Christmas trees than the guy next door? The typical answer is to undercut him on price. Same goes for any seasonal commodity.

Happy Turkey Day from the Chief Pricing Officer!

Anyone who watches football on Sunday probably has Toyota’s “Saved by Zero” jingle permanently (and annoyingly) ingrained in their head, and recent news shows that Ford is employing a similar tactic to boost sales. In addition to joining its colleagues on Capitol Hill to ask for some federal financial help, Ford has come out with an employee-pricing-for-all strategy after the company’s sales plummeted by 30 percent last month.

The use of employee-pricing tactics is touted as “an interesting experiment in fixed pricing” by the all-things-automotive gurus at Edmunds.com. And indeed, being offered an “insider’s” rate is certainly an enticing psychological gimmick. Actually, the folks at Edmunds call it a gimmick and a spade: “You can call it employee pricing or rebates or incentives or deep discounts, but the bottom line is the bottom line: Cut prices, sell more.” (Last week’s “Family & Friends Discount” offered by Gap, Inc. is another example).

When it comes to pricing, there is obviously a huge psychological factor: People associate any lower-than-retail pricing as scoring a deal and when billed as an inside deal, the result is to feel way more special than one’s fellow consumers. Certainly not a new ploy, but as evidenced by some of the U.S.’s largest retailers, a tried-and-true way to move a lot of volume in a short amount of time.

What is the long-term implication of these strategies? While it’s true that the thinness of everyone’s wallets results in less buying, the downturn doesn’t negate the need for informed, reality-based pricing as a foundation for our economy. Downturns, big and small, have happened before, and that data can be injected into pricing approaches today. No matter what the economic climate, we need to work toward pricing – whether it’s for cars, cable-knit sweaters, or lamb chops – that is informed by the cost, supply and demand factors that matter for profitability.

SignalDemand customer, Hormel, was featured in The New York Times yesterday. In fact, the article was the 4th most emailed story on the NYTimes.com site. According to food reporter Andrew Martin, Hormel is working overtime to supply the nation with what many think of as the most economical of all proteins: Spam.

Though Martin doesn’t name prices or get into marketing strategy in the article, the gist is that, in times of economic belt-tightening, consumers are reaching for the foods they think of first when it comes to penny-pinching. In fact, the Times refers to Spam as “the most emblematic hard-times food in the American pantry.” Here’s a little more from the article, just for fun:

“Spam holds a special place in America’s culinary history, both as a source of humor and of cheap protein during hard times.

Invented duing the Great Depression by Jay Hormel, the son of the company’s founder, Spam is a combination of ham, pork, sugar, salt, water, potato starch and a ‘hint’ of sodium nitrite ‘to help Spam keep its gorgeous pink color,’ according to Hormel’s Web site for the product.

Because it is vacuum-sealed in a can and does not require refrigeration, Spam can last for years. Hormel says ‘it’s like meat with a pause button.’”

Though Hormel President Gary Ray wasn’t quoted in the New York Times story, he shared candid and upbeat “lessons learned” in pricing strategy with other major manufacturers at SIGNALS last month in Las Vegas.

As mentioned previously in the CPO blog, the 2008 SIGNALS event’s keynote speaker was best-selling author and Duke University professor Dan Ariely. Of course, as the economy and election aftermath take center stage, it would make sense to see the behavioral economist’s commentary all over the media:

Business Week:  “Homeowners cling to false optimism about own home”
Scientific American:  “Who has a better sense of humor – Liberals or conservatives?”
The New York Times: “Eyes Off the Price”

But whether we’re talking about the housing slump, politics or the gas pump, his observations show us that the human and emotional sides to pricing are very real. In the BusinessWeek article regarding real estate pricing, Ariely says, “To a homeowner, a low, but realistic, listing price is ‘like someone calling your kids ugly.’” And in relation to that weekly fill-up, he slyly notes, “Perhaps it would be better if gas station attendants filled the tank for us, as they used to, so we did not stand at the pump watching the rising price of our gasoline.”

As he highlights the emotions surrounding our sense of pricing and what we feel that things should cost, I am reminded of what this means on a larger scale: Manufacturers dealing in millions of widgets, barrels of oil, or bushels of wheat aren’t immune to the pitfalls of what is essentially irrational human behavior. But if they are to compete in today’s economy, they have to make the effort to stay above the fray.

Price optimization science – integrating as much historical, economic, and market-based data as possible – is essential to achieving this. The key word here is science: Every price should be as informed as possible and framed in the most current and relevant context available. And while there is always going to be an emotional component to the prices that humans negotiate with other humans, the goal should be – especially for complex and many-tiered industries – decreasing the weight that those emotional factors play.

Experts like Ariely throw very valid questions into the mix, and the marketplace of ideas is the better for their contributions. But how can we mitigate the irrationality in our own pricing behavior? Information is key in that battle. With everything available to us at the push of a button, it’s almost foolish to not use as much data as possible to make decisions – be it to guide our decision making, or to prove or justify a hunch or gut feeling. Information can help us better rationalize the choices we make, and it’s key to helping us make pricing decisions that make sense, both today and tomorrow.

There was an interesting Wall Street Journal story last week about retailers pushing back against rising food prices. With the cost of oil falling and commodities prices leveling off, retailers may now be resisting manufacturers’ price hikes:

With corn, wheat and other commodity costs coming off their summer peaks and the economy continuing its slide, grocery chains in the U.S. and abroad are balking at food makers’ efforts to raise prices further.

Some retailers are using food companies’ earnings reports as leverage to reject price increases, according to industry analysts. Others are pushing for more promotional allowances – such as buy-one-get-one-free deals – to help move higher volumes of goods.

These actions serve as a not-so-subtle reminder that companies need to be mindful of where prices are going, not just where they’ve been. Being proactive about pricing – spending time to forecast upward or downward trends – allows manufacturers to proactively adjust prices, rather than price in reaction to retailers’ requests.

Retailers are now understandably sensitive about passing along additional costs to consumers, so manufacturers need to be even smarter in how they price each product in their portfolio. Rather than across the board price increases, manufacturers need to carefully examine profitability by customer, channel and product mix.

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)

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.

The September 2008 edition of The McKinsey Quarterly features an excellent article with six tactics for pricing as costs rise and price sensitivity increases. It is clear that as margins grow ever more narrow, price becomes an even more powerful lever for driving profitability.

The article, Pricing in a downturn, points out the importance of monitoring customer-level profitability. My opinion is that with the right insight, it’s also possible to not only monitor, but manage product-level profitability as well…more on that in another post.

Enjoy.

Now, several things come to mind because of this story, the main being a creeping fear that if 99 Cents Only is raising prices, our economy is truly in trouble. Beyond that, however, is how important a penny – 99/100ths of a penny – is to the chain. It’s almost incomprehensible to think that by raising prices by less than one cent, the store can start to remedy the woes facing its bottom line. But it can. Think about walking into a dollar store, then think about all the items loaded on the shelves, then multiply that by the countless people who file in and out, buying different nick knacks at 277 different stores, then start adding up all those pennies. Pretty soon, they start piling high and, indeed, those pennies make a huge difference.