We are occasionally asked by clients or prospective clients to help them simplify their pricing. These requests are usually the result of the company struggling to manage the myriad prices they offer, but also often include a desire to make it easier to engage customers, or a desire to improve the margins on the lowest priced customers. In all cases, the companies want their overall profitability to improve. Unfortunately simplifying pricing is often not a good idea and can lower a company’s profits.
Last week there was an article in the Wall Street Journal, So Long, Hamburger Helper: America’s Venerable Food Brands Are Struggling which discussed the declining market shares of some of the largest packaged food companies. It is not a surprise; the large CPG companies have been losing customers for the past few years on multiple fronts. Although many companies would interpret declining share as an indictment of their pricing strategy and would lower their prices, doing so would likely make the situation worse. It is much more important to understand what is happening with each customer segment and tailor their actions to the segments.
While there are surely more important things than crowd size for our politicians and news media to worry about, both groups have participated in a flurry of recent discussions of the expression “alternative facts”. While that is not a term often heard in negotiations, other erroneous statements are. You can improve your profitability by using the right tactics in responding to these alternative facts.
Remember that everyone, including your customer, operates in their own self interest. Often that means stretching the truth a bit. As evidence, consider how you behave as a buyer. Have you ever told a car salesman that another dealer offered the same car for a lower price, when it was not the exact same car? It happens all the time. That is why car sellers ask for documentation. Not all buyers are liars, but they are all looking out for themselves or their companies. Be ready to counter some of their claims during negotiations.
“Your products are exactly like your competitor’s “
First, don’t accept commoditization of your product. Your customer bought your product initially based on its value. Remind them of that. What are the differences in performance and durability? If your product lasts longer or performs better for the customer, they will realize cost reductions or revenue improvements from them. Even if you are selling the identical brand as your competitor, there are probably differences in service, delivery, reliability and availability. Make sure you identify these and sell the value of them. Make sure all your sales people understand these differences and are not trapped by the commodity mindset.
The availability of data and tools to analyze them have increased significantly over the past few years. Many companies have added pricing analytics capabilities and have purchased new data visualization tools. Those are steps that can improve profitability, if they are focused on the right pricing analyses. Unfortunately, too many companies spend their time creating cool new visualizations of basic metrics that are of limited use. To capture greater margins, it is important to focus on more granular indicators of price effectiveness that can enhance decision making.
A little more than a month ago, Jet.com opened its digital doors for business. Jet’s stated goal is to “make shopping more transparent, more efficient, and at the same time, a little more fun.” The pitch to potential customers is they will save money buying things on Jet.com instead of Amazon, Costco, and other online and physical stores. Jet promises to be the lowest price provider for consumers who pay an annual membership fee. Jet claims they will make money once they get up to scale. In other words, they will make up for these low prices with greater volume. I am skeptical.
Last week I decided to try Jet.com. I created my account and surfed for some of the products we regularly buy. The first item I searched for was dog food. We have an 80 lb. Lab who requires food for sensitive skin. We have been buying a specific brand at PetSmart for years. We paid slightly over $53 for a 30 lb. bag the last time we purchased it. On Jet.com, it listed the retail price at $73.77, but my price was $44.61. That was roughly a 15% savings over the store price. In addition, since we were spending at least $35, shipping was free.
I then searched for a personal care product which we have purchased in our local grocery store and at Costco. I could not remember the price we paid at either store; but at a price of $3.46 (retail was listed at $4.21), I was not willing to shop around, and I ordered the product. We just don’t buy enough to make comparison shopping on small items worthwhile. It is interesting to note that for this blog I found the same product on Amazon.com for $6.97, which makes me suspect the Jet.com web scraper was referencing the wrong product before setting this price.
I next searched for and ordered a household cleaning product that we could no longer find in our local stores. It was available at Jet.com for $13.71 compared to the posted retail price of $14.45. Again, I did not comparison shop, I just ordered it. At checkout, I was notified this product would be arriving in a separate shipment. When it did arrive, it came from Sam’s Club so I checked the price at Sam’s online. It was only $8.18. So everything I saved on the personal care product, I gave back on the cleaner!
Based on my small sample of ordering, it is difficult to tell if Jet.com is trying to be savvy with their pricing or just has some kinks to work out, but I suspect it is the latter. I clearly saved money on the first two items, but lost money (versus alternatives) on the third. If Jet’s intention is really to be the lowest price provider of all products, they need to improve their internal price comparison processes. I doubt they want to be 40% below the competition, or 67% above the competition. If they really are trying to be savvy and have a large number of items where prices are higher than competitors, they can count on customers like me who already have ordered something and add a few things that are convenient to buy, without comparing prices.
If Jet.com is really trying to be the low-price leader I am skeptical they can earn a decent return. I agree that they have to get up to a larger scale before we can really assess their profitability, but even then I doubt they will be very profitable. Amazon, Costco and Walmart already have very low prices and very well established supply chains. I don’t believe Jet will be able to develop a cost advantage over them. Jet’s membership fee will be lower than those of Costco and Sam’s Club and lower than Amazon’s Prime fee, so counting on membership fees to make up for low margins is unwise. Those three competitors are used to competing hard for shoppers and if they find they are losing volume to Jet, they will probably react with prices or promotions to protect their business.
This is a business model we have seen before. Offer low prices and good service to take business from existing competitors. Generate enough volume to offset the lower margins and fixed costs of infrastructure. Costco makes it work with much higher average purchases per visit, a huge array of private label, and a managed range of products. Walmart makes it work with very low supply chain costs, but is no longer the clear price leader and growth has slowed. Amazon continues to grow with a huge array of products, but profitability is not great. Jet is offering low prices and service seems to be ok, but I don’t see how they can consistently and profitably take business from these retail giants with more volume of lower margins. I think it will be another example of a business failing with a strategy to lower prices but make it up on volume.