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sSummer is coming and the race soon will be on.

Every year, as the special holidays such as Memorial

Day and July 4 approach, beverage companies,

snacks companies and retailers deeply discount their

products in anticipation of the picnic sales rush.

The same thing happens during the year-end holiday

gift-giving rush. The day after Thanksgiving, well-

established retailers hold highly advertised sales, with

substantial extra discounts announcing their intention

to be the most attractive place to shop. In so doing

they signal emphatically their intention to initiate a

game of aggressive pricing for the coming selling

season. The effect: other retail competitors feel

compelled to meet the aggressors' tactics with

similar price discounting to make sure they do not

miss the season's gold rush.

Is this a price war? If not, the dynamics are virtually

indistinguishable. A promising retail market plunges

headlong into irrational and unstable price

competition - due to euphoric competitive pricing.

IN THIS ISSUE PAGE

Euphoric Competitive Pricing

and the Irrational Rush for Sales

by Gerald Smith .................................... .....1-2

Adapting to Culture and Pricing

for Value in China

by Michael N. Hurwich ...............................3-4

Optimizing Price is a Beautiful Thing

by Rapt, Inc ................................... ............3-4

Insight and Execution:

The Keys to B2B Pricing

by Rafael Gonzalez Caloni..............................5

Pricing in Tough Economic Times

by George E. Cressman, Jr. and

Francois Delvaux ...................................... .....7

June 9-12, 2003

Radisson Hotel and Suites • Chicago, IL

www.iirusa.com/pricex

UPCOMING EVENTS

The Official Newsletter of the Pricing Institute

By Gerald Smith

www.aboutfoundation.com

This destructive behavior is closely related to a

familiar dynamic in game theory. Game theory

suggests that players are better off if they can

convince other competitive players to set higher

prices and share modest profits. But the risk of fail

is significant if some players defect: losers lose big

the low-price winners.

If competitors are "rational" in the early stages of th

season we should expect a favorable game in whic

all players are better off and all boats benefit from a

rising tide - growing seasonal demand and

inexperienced shoppers entering the market who d

not frequent stores or Internet shopping sites durin

other times of the year. These shoppers have little

time for price comparison shopping. Competitors

should be charging premium prices to buyers who

want to ensure they get the products they want at

convenient locations and times - the perfect holida

gift or the freshest picnic beverages, snacks or fooPricing professionals refer to this as priority pricing

resulting in healthy margins for players.

All of this should be true, but often it is not becaus

competitive euphoria undermines the market. Rath

than focusing on valuable product mixes, service a

inventory availability - and charging commensurate

prices - many retailers focus on winning the race to

win the most sales the fastest. They deeply discou

prices to attract customers - or to make sure

continues on pag

Euphoric Euphori c Competitive

Pricing and the

IrrationalRush for Sales

The Pricing Institute is a division of the

Institute for International Research

360° PricingIssue 1 • Volume 1 • May 20

RICINGINSTITUTE

www.pricinginstitute.com

JOINT VENTURE WITH



competitors do not steal customers from them.

They fall headlong into the well-known prisoner's

dilemma: rather than sharing modest profits with

other rational competitors in a stable market, they

share losses with irrational competitors in an

unstable market – all driven by the hope that by

moving first they will win big – or, more importantly,

that they will not lose big. Low-knowledge

investors and the media cheer from the sidelines,

keeping a daily vigil on same-day sales growthrelative to last year and affirming their belief that

retail revenue growth is a reliable indicator of

profitability.

We saw this mentality more broadly with the e-

tailing euphoria at the turn of the century, where

competitors tried to out-discount one another to

achieve rapid sales growth during the Internet gold

rush. In each case, the rush for immediate sales

overruled the common sense of building and

reaping the rewards of long-term customer value.

Why does widespread competitive price

aggression prevail in such promising growthmarkets?

First, there is a capacity effect. Each player stocks

up considerably for the anticipated sales rush,

knowing that every other player is doing the same.

There is a prevailing perception among

competitors that the market will be awash in

inventory capacity. At the end of the season no

player wants to get caught holding the bag of

excess inventory.

Second, the stakes are high since sales rush

periods are critical to broader sales and profits.

Many toy retailers, for example, rely on the year-

end holiday season for nearly half of annual

revenues.

Third, there is a demand effect. In the rush,

competitors make the implicit – and mistaken –

assumption that all customers demand the same

thing: great products at lowest prices. In fact,

many customers place price low on the priority list.

In holiday retailing, some customers want only the

best or the latest or the most stylish, while some

want absolute shopping convenience – to quickly

get in and out of a store or Internet site. Still others

want absolute assurance that they will be able to

get precisely the gift they want to give. Imagine thevalue that these customers realize when these

legitimate needs are met – and the folly of retailers

severely discounting to give it all away.

360° Pricing • May 20032

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It defies managerial pricing logic that these firms

spend their most valuable marketing resources

(advertising/promoting at the most opportune

market moment) appealing to the least valuable

customer segments – brand switchers and

discount buyers – and adopting the harmful

practices of irrational competitors. They train their

existing loyal buyers to focus on price, rather than

the important differentiating benefits the firm

spends the entire rest of the year developing. They

unwittingly unleash a negative framing effect on the

rest of the market by expanding the low end of the

market, which causes other buyers to adjust their

own price expectations downward. And by

packing their stores with discount shoppers, who

quickly deplete the best inventory, they depreciate

the value of the shopping experience for those

who prefer an unhurried experience in a store

prepared to meet their needs.

What is the solution to euphoric competitive

pricing?

First, it is essential to educate competitors about

its destructive effects and teach them how to

properly manage relationships with their

competitors. Retail associations, industry

conventions and Chambers of Commerce offer

forums to do this.

Second, players must play to their own

competitive advantage and signal other

competitive players of their intent to pursue non-

price strategies. Niche marketers, such as catalog

companies (Popcorn Factory, Coldwater Creek,

L.L. Bean) or some fashion retailers (American

Eagle Outfitters) do this well by offering tailored

and differentiated product mixes at full price.

Finally, strong gross margins are essential tosurvive euphoric competitive pricing. This was

especially evident in the Internet rush, where

companies with strong gross margins such as

eBay were much better able to weather the

intensity of euphoric price competition, while

others with weak margins (Garden.com, Value

America Inc. or eToys) struggled.

The lesson: survival and success go to the fittest

and the smartest, not the first to discount ever

earlier and deeper to win the next irrational rush for

sales. s

Dr. Gerald Smith is Associate Professor of Marketing

at Boston College and a consultant and lecturer on

competitive pricing strategy with the Strategic

Pricing Group, Boston.

Euphoric continues from page 1 ...

Don't miss the next issue of 360º Pricing which will feature an article by the

father of value-based pricing himself, Dan Nimer. A PRICEX trailblazer at this

year's event, Dan's article is titled On The Pricing of Mercedes, Joy

Perfume and Other "Stuff".

360° Pricing

EDITOR AND PUBLISHER Heather Kalish

ASSISTANT EDITOR Michael Hurwi

BUSINESS DEVELOPMENT Deborah Hatch

MARKETING MANAGER Adrienne Nich


[email protected]

Sneak Peek!



T There's no secret about the benefit of optimizing price - a one

percent price improvement delivers eight percent of profitimprovement, according to McKinsey & Company. Yet many

companies have spent the past few years cutting costs

through workforce and COGS reductions and ERP

implementations – until there are few, if any, costs left to cut.

If optimizing price delivers better results, why have many

businesses spent so much time and effort cutting costs?

Simple: because until now it has been easier to cut costs than

to optimize prices in the face of uncertainty. There is much

uncertainty in business today, whether it is economic,

marketplace, competitor or other industry conditions. When

faced with all these variables, many companies focus on the

elements individually rather than taking a collaborative view of how the variables affect one another.

Companies seem to hold the misperception that price optimization is too complex and unwieldy to

generate true, rapid results. Pricing technologies, however, have emerged over the past decade as a

credible and reliable solution for companies to gain market share, increase revenue and improve profits.

Once predominately utilized in the retail and hospitality industry, today new approaches to price

optimization make it possible for high-technology manufacturers, semiconductor producers and even

media companies to recognize significant business improvements. Hewlett-Packard utilizes a Rapt price-

optimization solution that delivered revenue uplift of $15 million per quarter in their Unix NA Division.

Price optimization makes it possible to reduce the impact of uncertainty and create an environment of

improved predictability. By engaging advanced mathematics, in addition to spreadsheet arithmetic, critical

pricing tools are developed for dealing with uncertainty. This practice is not new; commodities traders have

M

May 2003 • 360° Pricing

Introducing:

It is with pleasure that we announce The Pricin

Institute’s Cross Industry Corporate

Practitioner Advisory Board. These

professionals have been chosen specifically to

represent their industry and to lend their

expertise as we grow the Pricing Institute and

work to establish PRICEX as the premier

PRICING industry event. Welcome Aboard!

Ken Levy, Director of Pricing

Roche Diagnostics

Anita Burrell, Global Health Economics

Aventis Pharmaceutical

Joseph Marigliano, Director of Pricing

Hagemeyer

Mitch Farber, Director, Business Development

Cingular

Steve Maguire, Director Business Analysis

Sears

Harold Peck, Sr. Pricing Manager

Best Buy

Bob Baker, General Manager, Strategic Pricing

Armstrong World Industries

Register Now!

Visit www.iirusa.com/pricex or call 888-670-

8200. Be sure to mention the code XMP-NEWS

No other event being offered today provides as

many best-in-class case studies from as many

corporate practitioners such as Alcan

Aluminum, Armstrong World Industries, Best

Buy, Dell Canada, Eastman Kodak Company,

Fed Ex Latin America, General Motors,

Hagemayer, Hewlett Packard, Livingston

International, Michelin, Roche Diagnostics,Rockwell Automation and more. Plus, don’t

miss the keynote speeches from:

• Don Soderquist, Former Senior Chairman

Walmart

• Kent McNeley, Vice President

Eastman Kodak

• Sanjay Dhar, Professor

University of Chicago GBS

My recent experience in China gave me an

opportunity shared by only a handful of pricing

consultants. I was invited to share my strategic-pricing knowledge and experiences with senior

executives and management from some of the

best-known corporations in and around China. The

participants represented industries such as

pharmaceuticals, tire manufacturers, flavorings and

fragrances, telephony, distribution and consumer

packaging.

I want to share my observations of how companies

conduct business in China and the pricing

knowledge I obtained from industry participants

and by watching an American negotiate a

purchase at a select Shanghai retailer.

There is enormous opportunity and competition in

China as companies race to capture as much

Adapting to Culture and

market share and profitable revenue growth in

their respective industries as is relevant and

attainable

China's Gross Domestic Product reached $1.21

trillion USD in 2002, an increase of 7.9 percent.

according to official estimates and is expected to

grow by another eight percent in 2003. While

there is controversy about the accuracy of the

official estimates, China's GDP growth has few

rivals. This success is partially based on China's

admission into the World Trade Organization in

late 2001 and the GDP growth and increases in

exports are expected to continue at a significant

rate.

Here are my personal pricing observations aboutthe strengths, weaknesses, opportunities and

threats of conducting business in China.

continues on page 4

continues on page 4

Pricing for Value in China

Optimizing Price Optimizing Price is a Beautiful Thing

By Rapt, Inc.

By Michael N. Hurwich




1 As many of the delegates attending my

Strategic Pricing Workshops reminded me, the

Chinese have been in the merchandise and spice

trade for centuries. Value pricing, however, has

traditionally taken a back seat to ensuring market

share is retained and grown at all costs. As a

result, the Chinese are accustomed to negotiating

on price rather than the value propositions of the

product offerings.

2Many multi-national companies have failed

over the years by behaving in ways that

induced price wars in the Chinese marketplace. In

an effort to unseat the incumbent many foreign

companies have taken a pricing-penetration

approach to gaining market share and revenue,

only to find themselves immediately matched on

price by domestic competitors.

3 An environment controlled and managed by a

centralized government creates substantial

challenges for domestic and foreign competitors.

Many companies have failed, and continue to fail,

by adopting pricing strategies that providealternative approaches to varying customer,

regional segments and government interference.

For example, the government often requires that

certain pharmaceutical OTC drugs be priced lower

to reduce the financial burden for the government

and end-users. Branded pharmaceuticals usually

are given little time to adapt to such mandates. In

fact, the government encourages price

competition by providing little in the way of

penalties to generic pharmaceutical manufacturers

copying prescriptive drugs prior to their coming off

patent.

4 The new generation in China is adaptingquickly to western forms of capitalism,

especially in the larger cities and provinces. Higher

quality products and services are not only

appreciated but also expected. As product

proliferation is abundant in China, with new line

extensions competing for attention in a growing

market, one means of differentiation is for a

company to provide additional customer service

and price accordingly to capture the incremental

positive differentiation.

5

Companies must be able to execute on the

acronym MASDA (Meaningful and Sustainable

Differential Advantage) as coined by Dan Nimer of

The DNA Group Inc. China is effective and efficient

at duplicating products, services and images and

producers benefit from a murky legal system and

inadequate protection of intellectual property.

Companies must adopt a strategy that

differentiates them from the domestic competition.

More importantly, companies must quickly adapt

to ensure they have a differential advantage, even if

intellectual property is compromised. To combat

price transparency and rapid product duplication,

communicating value to the end-user plays an

important role in securing market share and

sustaining brand awareness.

6 The Chinese leave money on the table as they

have been so conditioned to negotiate on price

that they have failed to segment their customers

into categories, such as Price Sensitive,

Convenience, Loyal and Value Shoppers, to

capture additional revenue from the segments that

value quality and/or other non-price attributes.

In a well-known jewelry store, I watched a savvy American negotiate the purchase of several

necklaces to take back to the United States. The

salesperson was excited about selling several

necklaces to one person and offered a 50 percent

reduction from the list price. As a result, she

immediately compromised the integrity of the

pricing ceiling and opened the door to further price

concessions by unintentionally communicating that

she was selling on price rather than value.

By the time the negotiations ended the purchaser

had a 70 percent price concession. At one point,

he threatened to walk away from a 65 percent

reduction unless the salesperson capitulated. Laterthe customer admitted to me that he would have

accepted 65 percent but believed the

salesperson's hand was revealed when her boss

arrived and stood behind her for the balance of the

negotiation. He believed the boss was applying

pressure to close the sale, even though he did not

speak during the negotiation.

The market in Central China, particularly in large

cities is primarily high-net-worth or low-value

customers. Moving from a cost-based, price-

sensitive approach to value-based pricing involves

researching and segmenting customers and

understanding their decision selection criteria atboth ends of the pricing spectrum.

Companies should satisfy customers only to the

point where the incremental increase in customer

satisfaction that can be captured in the price

exceeds the incremental increase in the product

cost. Since a company cannot always create the

same value for all customers, value-based

marketing and pricing suggests that a company

should carefully select its customers. This involves

determining when to respond in kind to price or

price competition and when a non-price response

or no response is a pragmatic alternative.

China provides a significant and rapidly growing

market. Since China joined the WTO in 2001,

many domestic industries have been forced to

compete on the foundation of well-managed goals

and objectives. Joining the WTO has put

enormous pressure on the Chinese government to

reduce trade tariffs over the next five years on

many goods and services in numerous industries.

As a result, the situation is becoming fairer and

less restrictive for multi-national companies. As

well, the Chinese marketplace has come to

mastered the notion of providing predictability in

the face of uncertainty and have built a multi-bill

dollar business out of it. What is new is that thes

mathematic principles and philosophies can be

applied to price optimization.

Businesses today demand analytic applications

that deliver answers, not just access, as thestarting point of data analysis. From that point, t

price-optimization tool must deliver a dramatic a

favorable return on investment that can be

measured in days or weeks instead of months o

years.

A company seeking to implement price-

optimization technology should begin by selecti

an application that houses a strong analytic eng

that truly understands the specific structure of th

company's particular optimization model. In sho

the engine must be able to translate word

problems into mathematic terms and then ident

the right model for solving the price-optimizationpuzzle.

Comprehensive visibility across a company's en

operation is key for the success of any pricing

solution. By utilizing the science of price

optimization, companies can more precisely

predict the impact of their pricing decisions bas

on a fusion of demand, sales force execution,

customer willingness-to-pay and financial results

areas that every corporate stakeholder expects

be effective and efficient.

In today's world, organizations that welcome an

embrace uncertainty will prosper, whether in thebusiness of price optimization or in a particular

vertical or horizontal industry. In the face of

uncertain markets and economies, price

optimization can be deployed as a powerful,

strategic weapon. And there is no time like the

present to make that happen. s

For more information, contact Rapt, Inc.

Phone: (866) 999-1555

Web: http://www.rapt.com

Email: [email protected]

appreciate and value quality in many industries

such as electronics, hotels and hospitality, cars,

fast food and wireless technology.

Companies will succeed in this marketplace if

provisions are in place to develop a roadmap of

their management system for a value-based

pricing strategy and a method to deal with cultu

and organizational roadblocks that slow the valu

based pricing process. s

Michael N. Hurwich, Partner

Foundation Pricing Group

http://www.aboutfoundation.com

Optimizing continues from page 3 ...

Adapting continues from page 3 ...



PPrice optimization has a reputation for generating

higher profits in industries such as retail, hospitality

and transportation. Optimization works well in

these industries because customers are price-

takers, numerous, self-select among different

offerings and engage in many individual

transactions.

Companies in these sectors can treat their markets

and customers as portfolios, where predictable

segments purchase offerings at price points thatgenerate optimal profits. Given the buzz generated

by optimization, it's no wonder other industries

want to jump on the bandwagon. But is

optimization the best way to go for

B2B?

Most B2B environments differ markedly

from retail, hospitality and

transportation. Perhaps the most

important distinction is that customers

are not price-takers. Indeed, customers

usually wield pricing power, much to the

dismay of sellers. An optimized price

rapidly loses its significance whencustomers constantly negotiate and

trade off every element of their business

relationship with the company.

To deliver higher margins from pricing in a

negotiated environment, companies must resist

the temptation simply to adopt proven retail

practices. Instead of focusing on optimizing prices,

they must think about managing price against this

backdrop:

s Profitability varies widely, even across similar

customers and deals

s Many negotiated price and non-price elements

contribute to this variability

s Companies lack visibility into, or effective

control over, this process

So how can a company optimize its margins in a

negotiated environment without resorting to the

tools that have been successful in retail? Two

words are key to pricing excellence: insight and

execution.

Let's begin with pricing insight. Many companies

are surprised to find that star customers may

actually be costing them money, while other, lessvisible, customers contribute solidly to the bottom

line. The same is true for some sales reps, who

may "blow away their numbers" and "blow" a hole

in margins. This also is true for product lines,

customer segments and channels. Figuring out

who's who does not require optimization, but it

does require tracking and understanding every

element on every transaction: list price, discounts,

invoice price, rebates, allowances, shipping

charges, services, net price, product costs and net

margin.

This detailed information can be used to look for

the outliers. What elements are driving lower

margins? Is discounting always justified? Are free

services to smaller customers hurting the bottom

line? Are some customers significantly more or less

profitable than their peers?

In analyzing business after business, the

surprisingly consistent conclusion is that similarly

situated customers, products and sales reps will

show anywhere from a 30 to 70 percentage point

difference in profitability and that many companieshave a significant amount of money-losing

business.1

Once companies have gained this insight, they

need to ensure consistent execution. Here again,

the answer is not to deliver an optimized price that

is negotiated away. At a minimum, companies

must provide the sales force with insight into how

every element of a negotiation affects the bottom

line. Ideally, sales forces have tools to negotiate

deals that meet the company's profitability goals.

Insight and execution are straightforward in

concept. In practice, however, they require

companies to develop and roll out tools to analyze

their pricing and empower consistent deal

negotiation. Companies traditionally have relied on

homegrown tools such as databases that capture

transactional data to conduct pricing analysis and

spreadsheets for sales reps to model deal

scenarios. This approach, while time-consuming

resource-intensive and inflexible, has provided a

significant step forward from the no-insight,

inconsistent-execution starting point.

As web-based enterprise applications have

matured, however, companies have begun to

adopt dedicated price-management solutions th

automate manual data capture and analytical

processes and add significant flexibility around

how deals can be structured, reviewed andapproved. The visibility these systems bring to t

entire pricing process reveals significant

opportunities to improve margins

by up to two percentage points.2

Early adopters of price-

management solutions stand to

gain a significant advantage by

bolstering their bottom line, just a

most competitors struggle to

protect, never mind grow, margin

in the current environment.

Ultimately, optimization's succes

retail and other sectors has serve

to awaken other industries to the

potential of price management fo

strengthening the bottom line. By gaining greate

insights into pricing variability across the busine

and improving front-line execution, companies in

negotiated-price environments can significantly

increase margins without raising prices or even

changing the underlying dynamic of the busines

where buyers and sellers will continue to develo

unique deals that meet both their needs. s

1 Vendavo analysis of diverse companies in process

and discrete manufacturing industries .

2 Vendavo customer experience.

Rafael Gonzalez Caloni is Vice President of Mark

Development for Vendavo. http://www.vendavo.co


Insight and Execution:

The Keys to

B2B Pricing

Did You Know... A gallon of water is more expensive than a gallon of gasoline?

The last time I checked, a gallon of water at the local convenience store was

around U.S. $2 while an equivalent amount of gasoline was approximately $1.06*.

Why is water costlier than gasoline? The answer has to do with utility and scarcity.

It appears that consumers find water more useful and scarce than gasoline and are

willing to pay for the convenience of ‘perceived’ good quality water.

So, the next time one of your colleagues says:“We can’t raise price, because we are selling a

commodity product,” remind him/her that mature products such as water can command a premium

price if the economic value can be created, captured and communicated to the right audience.

—Michael Hurwich, Partner, Foundation Pricing Group * Gasoline: Sales to End Users through Retail Outlets in the State of New York in/around January 2003 (National Energy Information Center)

If you have a thought-provoking statement/ fact/statistic related to pricing principles, send it to [email protected] with th

subject heading “Did you Know?” If chosen, yours will appear in the next issue of 360° Pricing!

By Rafael Gonzalez Caloni







T This economy is tough! While it did not seem as if

things could get any worse, the first quarter of

2003 has left many managers longing for 2002.

The pressure for profit improvement is intensifying.

Because sales volume has declined for many

companies there is strong temptation to cut price,

grow share and regain some lost volume. Before

you do, however, read the caution: "Pricing

Professionals - Do Not Attempt This At Home."

Now is the time to think carefully about profitable

growth.

What's wrong with price discounting to grow share

and maintain volumes during tough times? Won't

customers respond to price cuts by ordering

more? Maybe ... but there are several problems

with this approach.

The first problem with aggressive price discounting

is that while customers welcome lower prices, this

may not result in higher sales for the company

initiating the price decrease. As shown in Table 1, a

company with a contribution margin of 25 percent

would require a 67 percent increase in sales to

offset a 10 percent price decrease.

Can the company sell more? Only if ultimate

demand goes up. If you cut price and there is no

change in ultimate market demand, customers can

bank your lower price and you won't benefit. This

lower price/same-demand environment is a no-win

game and one that is playing out in many markets

today. Demand curve gains? Forget it.

What about winning share away from acompetitor? Consider the competitor's situation:

their sales also are declining. And if they have high

levels of fixed cost, they have seen unit costs go

up as demand goes down – the same situation

you may be facing. Suppose you cut price to win

some additional volume. The losing competitor

sees demand decline even more and unit prices go

even higher. How are they likely to respond? By

cutting price to grow volume of course. The result?

A full-blown price war, with declining profitability for

all.

There's an additional problem. As companies cut

price in an attempt to grow volume, customersbegin to believe their suppliers can live with the

lower prices. Even worse: as prices are cut,

customers learn delivered value does not count.

It's all about price - low price.

Economies go through cycles over time. The

current challenge is that we seem to be in an

extended funk. But trust us - this economy will

start to improve. And when it does, companies will

regret their aggressive price discounting. Price

cutters will find it very difficult – perhaps impossible

– to improve prices. And if price discounting does

precipitate a price war, poor profitability will

continue to plague managers for years.

So what can managers do in a tough economy?

Here are the key priorities:

1. Assess the nature of declining demandDoes the problem arise from general economic

conditions or is it the result of aggressive

competitor moves? When the problem is the result

of slow economic growth, managers must adjust

their expectations. Even if customers get lower

prices, they will not take more - demand for their

products is down. When demand declines

because of problems in the macro-economy, the

first priority for managers is to adjust sales

forecasts and production to market realities.

Continuing to produce for higher levels of demand

means inventories will grow, increasing pressure to

"move the juice" while ignoring price implications. As inventory piles up, you will be tempted to price

for sales; the shorter-term pressure of inventory

builds will overwhelm concerns about longer-term

profitability. The antidote: adjust forecasts and

production to match the market.

2. Competitor actions must be addressed

Competitors may continue to produce and sell at

higher levels. Adjusting to market demand realities

only works when competitors also make

adjustments. An important management task in

declining economies is market communication

about the nature of the market and underlying

causes of demand shifts. The objective of this

market communication is to make sure all marketparticipants - customers and competitors -

understand changes in demand are caused by

economic trends not competitor opportunism. Of

course such communication doesn't guarantee

competitors will adjust their market activities. Our

experience, though, is that managers do not

always have accurate market intelligence and

respond slowly to changing market conditions.

Providing credible information about economic

shifts can go a long way in encouraging

reasonable market actions.

3. Customer communications and negotiatio

must be managed

The key to shorter and longer-term profitability is

management of customer value perceptions. In

tough economies managers often cut market

communication efforts to reduce costs. Reducin

market communications can have disastrousconsequences. Rather than reducing market

communication, tough times require increased

communication. Regardless of economic

conditions, customer communications should b

value based. Customers must understand the

economic impact - value - of what they get from

you and cannot get from your competitors. Valu

communication in tough economies does not ha

to create lots of extra cost: the sales force shou

be primed to frame value delivery in all sales cal

a good thing to do in all phases of the economy

As customer price pressure increases, the best

counter is accelerating value communication.4. Competitor interactions must be carefully

managed

As demand slows, managers will be strongly

tempted to chase volume – demand owned by

competitors. Taking a competitor's volume is be

done using a value-based approach against

competitors who have poor capability to respon

In tough economies, managers must carefully

evaluate every price move – especially those aim

at increasing demand. If the competitor can and

will retaliate, price wars are likely. Some volume

cannot be profitably won in either the short or th

long term.

Competing in tough economies is a challenge

many companies currently face. The situation is

frustrating and troublesome. While growth and

profit suffer in these markets, managing to

minimize the impact can be done. The key to

succeeding lies in careful management of

customer negotiations, competitive dynamics an

internal expectations. s

George E. Cressman, Jr. and Francois Delvaux ar

respectively, senior pricer and senior consultant at

Strategic Pricing Group.

http://www.strategicpricinggroup.com

Change in Sales Volume Required to Off-Set a Price Decrease

Assumes no change in incremental costs (fixed or variable)

%

Contribution

Margin

% Change in Price-5% -10% -15% -20%

20% 33% 100% 300%25% 25% 67% 150% 400%

30% 20% 50% 100% 200%

35% 17% 40% 75% 133%

40% 14% 33% 60% 100%

Pricing in Tough Economies By George E. Cressman, Jr. and Francois Delva



360° Pricing

Issue 1 • Volume 1 • May 20

Launched 16 years ago, The

Pricing Institute (creators of

PRICEX) was the original

forum for the dissemination of

ideas and new thinking on pricing tactics and

strategies. Our mission is to provide targeted

learning and networking opportunities through

conferences and seminars and help sustain an

ongoing dialogue between cross-industry

corporate practitioners, recognized

consultants/strategists and leading suppliers in

support of pricing as an evolving discipline.


Institute for International Research708 Third Avenue, 4th FloorNew York, NY 10017-4103

PRSRT S

U.S. POST

PAID

PERMIT N

BURLINGT

RICINGINSTITUTE

Foundation Pricing

Group (FPG) is a

market leader in value-

based pricing in B2B

and B2C markets. FPG is dedicated to working

with companies to develop pricing & marketing

strategies that challenge top and bottom line

performance. The firm's main services are pricing

strategy, research, education and training. Each

assignment is carefully managed by a professional

team using proven methodologies and techniques

to 'ensure a solid foundation for growth'.

Never before has Pricing received so much press! Given the current economic climate, the

mergers, the war, the controversy – it is no surprise that pricing has become a hot topic. Here

at the Institute we believe there is much to celebrate. We are proud to be in partnership with

the Foundation Pricing Group and together we look forward to providing you with fresh ideas

and perspectives in the Pricing Institute’s newsletter to help you position pricing as a

continuous process that involves an entire organization’s health, wealth and future growth. It is

with pleasure that we present:

Why 360° Pricing? Because pricing is everyone’s responsibility and we believe it should play

an integral role in organizations’ entire strategic decision-making process. This newsletter will

help sustain an ongoing dialogue between top industry strategists, cross-industry corporate

practitioners, recognized pricing consultants and leading technology suppliers in support of

pricing as a discipline. The goal is to provide thought-provoking pricing ideas and guidance to

support price decision-makers and management personnel from a wide array of industries.

We want to hear from you!

To sign up for an initial complimentary subscription and offer your feedback, please visit

www.pricinginstitute.com.

As we continue to grow, do consider our forums to help you promote and market your

organization:

1. Sponsoring and exhibiting our events

2. Conference session, workshop, seminar and webinar leader positions

3. Article submissions for upcoming newsletters

To learn more about The Pricing Institute or The Foundation Pricing Group, please contact

www.pricinginstitute.com or [email protected] and www.aboutfoundation.com or

[email protected], respectively.

Dear Pricing Professional,

360°

Pricing

Newsletter Presented By:

IN THIS ISSUE

• Euphoric Competitive Pricing and

the Irrational Rush for Sales

• Adapting to Culture and Pricing for

Value in China

• Optimizing Price is a Beautiful Thing

• Insight and Execution: The Keys to

B2B Pricing

• Pricing in Tough Economic Times

The Official Newsletter of the Pricing Institute

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