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.

Today Businessweek magazine is featuring comments from my friend and colleague Mike Neal (CEO, SignalDemand) on its homepage in reference to the article “Grocery Stores Fight Back Against Food Prices.”

According to its editorial staff, Businessweek’s new online “In Your Face” section highlights readers that offer “smart, incisive comments that move the conversation forward” - and this week the topic is Food 2.0:

The article is a worthwhile read, taking a look at the quickly forming “battleground” over food prices. Here’s an excerpt to give you an idea:

A year ago, when the cost of commodities such as wheat, oil, and corn was soaring, grocers grudgingly accepted price increases from Kellogg (K), General Mills (GIS), H.J. Heinz, (HNZ) and other food manufacturers. The strange thing is, those price tags never came back down, even when commodity prices collapsed in the fourth quarter of 2008. As a result, grocers have little cheer to offer their shoppers at a time of deepening economic gloom. “The prices don’t seem to go down as fast as they go up,” says Jeffrey Noddle, CEO of Minneapolis-based Supervalu, one of the nation’s leading grocers.

Now, the grocers are demanding action. On Jan. 7, Noddle told analysts to expect a “battleground” over the next six months as he pressures manufacturers to adjust their prices. And if they refuse? “In almost every category,” notes Noddle, “you have other vendors to look to.”

The food companies recognize that increases in the price of food outpaced commodity inflation during the fourth quarter last year, which should have resulted in higher profits. However, they argue, previous price hikes didn’t completely cover escalating production and commodity costs….

And for your convenience, Mike Neal’s comments in full:

Every major food producer has been anticipating this impasse. The problem lies in the fact that many producers don’t have the ability to accurately resassess their risk if they were to adjust prices. In order to confidently renegotiate contract prices, food producers must be able to accurately calculate the impact of price changes on volumes and margins, for each product line and customer contract.

Part of that calculation is a prediction of the success of demand shaping with strategic price changes. Without this knowledge and assurance, food producers with long term contracts could be effectively signing their own death warrants if faced with another jump in commodity prices.

Fortunately, technology has caught up with the pressures of the global marketplace and food producers are starting to adopt technologies that allow them to bring a new transparency and confidence to price strategy and contract negotiations. I envision that a new role - Chief Pricing Officer - will emerge from this awareness of the powerful strategic role pricing can play in the enterprise.

All you price professionals out there - what’s your take? Weigh in with a comment of you own on ChiefPricingOfficer.com.

Rip

One particular phrase in Obama’s inauguration speech really struck a chord with me and the folks I work with at SignalDemand. Obama declared he would…

“restore science to its rightful place”

To our ears, that sounded like a ringing endorsement for the work we do.

Science isn’t limited to the R&D labs - it should be at the heart of business. Applied science can provide the concrete evidence and predictive models required for making strategic, high-impact business decisions when thousands of variables and millions of potential outcomes are involved - way beyond the realm of standard business software or spreadhsheets. The field of wholesale pricing is a prime example and it’s a white hot area on the cusp of reaching its potential. It’s encouraging to hear that the new administration plans to refocus on science.

So, do you think he’s going to do it? Cast your vote by commenting below on whether Obama will “restore science to its rightful place.”

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.

Many hearty congratulations to Dan Ariely, who was just named one of Fortune’s “10 New Gurus You Should Know.” Very good stuff, and the article concludes with Ariely’s research into pricing issues:

Ariely, 41, also studies the logic behind spending patterns - what consumers are willing to spend on a product vs. their understanding of its value. And that will make him a very popular man in this economy.

Ariely, of course was the keynote speaker at our SIGNALS 2008 event, where he talked about negotiations and the role of human weakness in making decisions. We’ve talked about him before in this space, and it’s nice to see him get even more recognition for his work from a well-respected publication like Fortune. So, again, congratulations Dan, and keep up the good work.

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.

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.