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Pricing Flexibility

Monsanto is the dominant leader in the seed business. It has led in the development of genetically modified seeds for corn, soy beans and cotton. This spring, the company introduced new second generation versions of its herbicide tolerant soy bean line and its herbicide and pest resistant corn seed. The company expected to sell enough of the soy bean line to plant 8 to 10 million acres and enough of the corn line to plant 4 million acres. Instead, the farmers bought 6 million acres worth of the soy bean line and 3 million acres worth of the corn line. The overall demand for seeds was down somewhat due to the depressed economy, but DuPont’s Pioneer Hi-Bred seed line also gained share against Monsanto.

The problem Monsanto encountered went beyond the economy. It simply priced the new lines too high for the market. The new soy bean line cost 42% more than its predecessor. The new corn line 17% more than its predecessor. The company simply did not leave enough incentive for enough farmers to make the switch to hit the company’s volume targets. (See “Audio Tip #68: Producing a Net Value Improvement for Customers” on StrategyStreet.com.)

The company responded quickly. After watching the market make a shambles of its volume forecasts, it announced that it would reduce its pricing by enough to increase its market share again.

This speedy response by a company in the marketplace stands in stark contrast to our governmental response to high pricing. If governments set a price too high, both consumers and the suppliers suffer. Current examples are the government interventions in the market to fix minimum wages and to increase taxes on employment.

In simple terms, the government sets a minimum wage price that is generally above the price that some employers are willing to pay. This new price, whether a minimum wage or an additional tax on employment, depresses demand for employees at the same time as it raises the potential supply. In a market where there is already more supply than demand, this is a prescription for a great deal of pain for both employees and employers. Some employers will shift jobs to less expensive areas of the world or simply not do them. Some employees will simply not find work. In particular, the employees least likely to find work are those with the lowest levels of skills, primarily the young and uneducated.

Throughout the post-war period, Europe created a cradle-to-grave system of social protections. They financed these social protections with high tax rates, charges on employment, and restrictions on the ability of an employer to reduce its workforce. At the end of 2009, Europe faced high employment rates for its young people. Belgium, France, Italy, the U.K., Sweden and Finland had rates of unemployment for people under 25 around 20% to 30%. The U.S. is now approaching the same level. Its unemployment rate for workers under 25 is about 20%, while overall unemployment rate is around 10%. The unemployment rate among black teenage males is 50%.

Not all of this high unemployment will go away with the reduction in the cost of employment. Some of our unemployed youth simply must have training they do not have today. But we show no signs today of recognizing what our high cost employment system has done to the demand for our youngest potential employees. It is too bad that our politicians don’t measure success in market share terms. Monsanto does and reverses course. Our response, if it ever comes, will be very late. (See "Video #41: Pricing Considerations in Hostile Markets” on StrategyStreet.com.)

Posted 5/6/10

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