In the Classic of H G wells, ”War of the Worlds” he says the wars are the Victory of the dying over the dead. Nothing can more effectively describe Price wars either.
Price wars happen between competitors under the following circumstances
1. The market is not growing and there are already well entrenched players or there are new entrants into an industry and there is pressure to gain share. Too many eye-ball to eye-ball situations.
2. The market is potentially big but the price is a barrier to enhanced consumption, and therefore competitors try to grab share by placating consumers and there is a spiralling downward direction of prices.
3. The competition is “stupid”, does not know any other way of grabbing market share and thinks price reduction, which is the easiest implementation strategy, can solve all the problems. That is why Michael Porter, says that it is better to have clever than stupid competitors.
Those companies who don’t understand the consumer’s real assessment of Value are the ones who start the downward spiral. This begs the question, what then really is Value? I will do the next blog in more detail, but it will suffice here to say this..
Value is Price + Consumer Experience of Attributes
Attributes is the functional benefits that the consumer can expect to get from as promised by the manufacturer of the product or service.
Companies must realise that Price reduction has the most dramatic impact on profitability, and therefore it is preferable to attempt to make the consumer see the attribute value of the product (and we are assuming that the product really has intrinsic attribute vale). When the consumer sees the value in attributes of the product, it insulates the product against the downward spiral of price.
Price decisions are the most important in a company. In FMCG companies and product companies, this is taken seriously, and the highest level of management takes the pricing decisions and it is also because price changes are not so frequent.
However, in retail in India at least, pricing decisions are left to very inexperienced junior merchandisers of the company. The pricing decisions are so many and so frequent, that it gets delegated. The method of pricing decision control is often margin % review that the CEOs do and this is clearly inadequate. Pricing control using margin management is always too little too late because price changes distort the value presentation to the consumer. Margin % can be managed by compensating errors- increase price of A by 20% and decrease B by 40% - is compensating margins, and if A is the top seller then it is possible that the final margin is still the same. But the price reduction changes the “pricing experience” of the consumer, and in the short term will result in changes in quantity sales and loyalty of the consumer. It could seriously damage the “positioning” of the retail format in the mind space of the consumer
So retailers of the Country, don’t let a Fresher wet behind the ears, steer the ship into the ground. Let the ERP systems build in escalations, and authorisation, merchandisers must be trained well enough to grow into pricing experts.
Price wars happen between competitors under the following circumstances
1. The market is not growing and there are already well entrenched players or there are new entrants into an industry and there is pressure to gain share. Too many eye-ball to eye-ball situations.
2. The market is potentially big but the price is a barrier to enhanced consumption, and therefore competitors try to grab share by placating consumers and there is a spiralling downward direction of prices.
3. The competition is “stupid”, does not know any other way of grabbing market share and thinks price reduction, which is the easiest implementation strategy, can solve all the problems. That is why Michael Porter, says that it is better to have clever than stupid competitors.
Those companies who don’t understand the consumer’s real assessment of Value are the ones who start the downward spiral. This begs the question, what then really is Value? I will do the next blog in more detail, but it will suffice here to say this..
Value is Price + Consumer Experience of Attributes
Attributes is the functional benefits that the consumer can expect to get from as promised by the manufacturer of the product or service.
Companies must realise that Price reduction has the most dramatic impact on profitability, and therefore it is preferable to attempt to make the consumer see the attribute value of the product (and we are assuming that the product really has intrinsic attribute vale). When the consumer sees the value in attributes of the product, it insulates the product against the downward spiral of price.
Price decisions are the most important in a company. In FMCG companies and product companies, this is taken seriously, and the highest level of management takes the pricing decisions and it is also because price changes are not so frequent.
However, in retail in India at least, pricing decisions are left to very inexperienced junior merchandisers of the company. The pricing decisions are so many and so frequent, that it gets delegated. The method of pricing decision control is often margin % review that the CEOs do and this is clearly inadequate. Pricing control using margin management is always too little too late because price changes distort the value presentation to the consumer. Margin % can be managed by compensating errors- increase price of A by 20% and decrease B by 40% - is compensating margins, and if A is the top seller then it is possible that the final margin is still the same. But the price reduction changes the “pricing experience” of the consumer, and in the short term will result in changes in quantity sales and loyalty of the consumer. It could seriously damage the “positioning” of the retail format in the mind space of the consumer
So retailers of the Country, don’t let a Fresher wet behind the ears, steer the ship into the ground. Let the ERP systems build in escalations, and authorisation, merchandisers must be trained well enough to grow into pricing experts.
The moot question here is, are Retailers spending enough on Training?Are they being judicious enough in hiring buyers/merchandisers with the right skill sets and then investing adequate time,effort in grooming them? Till we have clarity and focus on this ,we will continue seeing situations of "galti se mistake ho gaya"!!
ReplyDeleteVery Intresting Article.. Infact this was the Very Reason A Large Retail Organisation Had to Shut Operation.
ReplyDeleteGreat article, and I feel Organized Retailers in the country, should get access to this, and the message should be translated into action ASAP. Thanks for giving me an opportunity to read such a great and impactful article.
ReplyDeleteFrom Rishi Agarwal
ReplyDeleteBoss , Extremely Insightful and very well encapsulated learning’s.
Actually differentiation for consumer can be built upon in totality by having best Offerings , Assortment , Positioning , Customer service , Experience and Garnering top of mind /tip of tongue Brand recall , unfortunately all this has taken a back seat..
Un required Price war’s annihilate organizations and should be last ting to do
.
At one level, top guys in a retail org compares promo leaflets of competetion and use that as a measure of their formats appeal to customers. And then they try to better on the already irrational price cuts if they dont already match up. And....at another level merchandiser's skills are measured by what best 'price offs' he offers for his categories by either squeezing his unwilling vendor or sacrificing his margin.
ReplyDeleteAt one level, top guys in a retail org compares promo leaflets of competetion and use that as a measure of their formats appeal to customers. And then they try to better on the already irrational price cuts if they dont already match up. And....at another level merchandiser's skills are measured by what best 'price offs' he offers for his categories by either squeezing his unwilling vendor or sacrificing his margin.
ReplyDeleteThe biggest problem in indian retail organisations is that there is no connect between the product/services offered to customer experience/satisfaction. Cust. Experience at the store is NEVER measured either before or after purchase!!! I have hardly come across any top manager asking about metrics like cust. sat. score / net promoter score/ servqual etc during the umpteen reviews they have with buying & merchandising teams.
ReplyDeleteIn an age where purchase behaviour is slowly but surely moving online decisions like pricing WILL become automated. I strongly believe that the last thing the SENIOR management should be involved in is the day to day management of SKU prices. The ONLY metric they should track on a daily basis is Customer Satisfaction across formats/regions . Any variation in this metric can then be drilled down to a specific reason.
As a former junior buyer/merchandiser for many years, I can clearly say from my experience that "uploading prices at 10 pm because my boss said so" was one of the most time consuming and non value added work I have done.
All very Interesting comments, and all of you obviously know,hands-on, the practical problems at the transaction level. Internationally, prices are seldome changed at such a short frequency, so many times. They are very watchful of consumer reaction and margin delivery. World over in all of retail I believe there is insufficient work on the pricing aspect. Since it is a complex matter, retailers tends to take comfort in saying "dont touch it" !
ReplyDeletePrice wars are a resultant of "Battle between minds of managers, traders, partners or proprietors" primarily for gaining supremacy in the market place.
ReplyDelete1. Resistance of managers mind towards price changes is driven by the extent of clarity one has in the organizational objectives to be achieved (quickly grab market shares or deliver expected ROI). These KRIs which every manager has to deliver as a part of his responsibility in any organization virtually benchmarks the risk apetite of the organization and strategy to be adopted for pricing.
2. Efficient market intelligence systems and quick communication processes providing instant access to information across the organizational ladders strengthens managers minds and provides lead time for reacting to market changes in comparison with competition.
3. The risk apetite of a manager is also influenced by the position of the firm amongst the industry players, the end-to-end strength of an organization to offer superior value delivering a product / service to customers and the financial muscle of the company.
4. Manager's have to develop aptitude for creating accurate reference point for the value offered and utility created on products / services in meeting customers needs vis-a-vis alternative solutions available and basis the willingness of the customers to pay.
The retail players have to develop systems and processes for addressing the above so that the pricing decisions are based on expansive rather than incremental approach. In doing so, instead of competing for snatching a share in the current pie incurring losses due to price wars, the size of the cake can further be enhanced which will accomodate more players....benefitting every stake holder....
a comment is the size of a blog post...hehehe
ReplyDeletePudhumai..as a blogger I love serious comments..but you love brevity I can see :)
ReplyDeleteSrinivas- you raise 4 very good points about pricing- Clarity, market information and intelligence,risk apetite and attitude. I agree. But clearly this "pricing" is Fuzzy logic.
Sir ,
ReplyDeletei would like to say only one thing most of the time the category guys change the prices basis there Buying prices particularly in Staples & FnV ,On this prices they try to match the benchmark which always lead to Lower margins , my appeal or request to any person who has the authority to change prices should always follow a certain guideline on Margin which have to be given by Management ,there are ways where margin can be maintainted stadly in this categories also .
you yourself are an expert , i would request you to pass on all the margin managment guidelines in one of your blogs , it will people in retail space .
Read Steadly for stadly
ReplyDeleteRead it will help people in retail space instead of it will people in retail space