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Pricing Confusion and Its Aftermath

There were a number of articles regarding pricing over the last few days that caught my attention. Whenever a market gets difficult, many competitors, but especially the leaders, can become confused about what to do with their prices. Here are some examples of both effective and ineffective pricing decisions.

Delhaize is a Belgian-based supermarket operator. In the United States it operates Food Lion, Hannaford and the Sweet Bay chains. The company saw its sales grow and market share increase during the second quarter of 2009 because it offered comparatively low prices and pushed its own low-cost private labels. The company’s market share gains came at the expense of competitors who did not emphasize low prices. Among these were Supervalu and Safeway. Both of the latter competitors now pledge to cut prices aggressively.

Unilever has a new Chief Executive, that is, he was new as of January 2009. The previous CEO had held prices relatively high. The new CEO quickly reversed course. The company cut prices all across Europe and sales began to grow. Not by much, but they did grow. And the company gained market share. In contrast, Procter and Gamble saw sales fall in the same period. Part of Unilever’s new low price emphasis is to respond quickly to cheap local brands. For example, in South Africa, the company’s Standard Leader laundry detergent came under attack from a less-expensive local brand. In response, Unilever launched an inexpensive version of its Surf detergent with fewer features. This new Price Leader product effectively countered the inexpensive local brand.

Joseph A. Bank Clothiers has continued to see its revenues and margins increase despite the very tough detail economy. The company sells classic fashions and casual clothing for men. It has always been a promotions-driven company. It cleverly offers selected discounts to keep customers coming into its stores. In the spring, it offered a $199 suit sale and then, recognizing its customers’ fear of job losses, promised to refund the price of the suit, and let the customer keep the suit, if the customer lost his job before July. Suit sales bounded and same store sales grew by more than 4%. The company continues to gain share from department stores and other specialty stores whose pricing is not as sharp.

Note that in each of these three examples, the company gaining share because of its low price would not have been able to do so had the other competitors in the market not allowed them to get away with the lower prices. The competitors who lost share were in a Leader’s Trap. (See the Symptom and Implication “The industry leaders are losing share” on StrategyStreet.com.) There is no good ending for a company in a Leader’s Trap.

Here is an example of pricing acumen from the U.K. grocery industry. A few months ago, Asda, the British unit of Wal-Mart, and Tesco, the industry leader, began reducing prices and issuing new advertising messages stressing their low prices. Within a very short period of time, the other two leading grocery chains, Sainsbury’s and Morrison’s, followed suit. Each of these chains are now emphasizing low low prices and private label products. The result? All four chains are growing and picking up share. The losers are the smaller, independent retailers who simply can not afford to dive to the depths of the discounts offered by the bigger guys. (See the Symptom and Implication “As large competitors match low prices other competitors face difficulties” on StrategyStreet.com.) The U.K. industry’s customers have not defected to discounters. There was no Leader’s Trap in this market as each of the largest competitors matched competitive prices quickly.

For more explanation and examples of the Leader’s Trap, see Diagnose/Pricing/Price Change Opportunities/Price Discount Opportunities.

Posted 8/20/09

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