Rafi Mohammed

It’s Hard for Me to Say This, But Sometimes It Isn’t All About Pricing!

Posted on January 12th, 2007 (0 Comments)

I know, I know…I’m a big proponent of pricing’s ability to save the day for most companies. But sometimes…pricing is just a symptom of a bigger ailment. A friend of mine has an interesting response to companies that call him to solve what they perceive to be their pricing problems. When he deems it to be the right conclusion, he screams into the phone “Your Problem Isn’t Pricing, You Have a Strategy Problem” and slams down the phone. Finesse is obviously not one of his finer points. That said, a good case in point of “it’s your strategy, not pricing” is the U.S. automobile industry.

U.S. auto pricing has always been a quagmire of uncertainty. Manufacturers set Manufacturer Suggested Retail Prices (MSRP) and then let the market and their sales people determine the actual transaction prices. From a market standpoint, sometimes actual transaction prices exceed the MSRP. For example, in the heyday of Toyota’s hybrid Prius car, paying $4,000 - $5,000 above the MSRP was the norm. More typically, transaction prices start off high (though often below MSRP) at the beginning of the model year and drop as the year progresses - usually culminating with “close out” prices to move inventory to make room for next year’s models. In addition to the market environment, the sales force play an important job in setting final transaction prices. With often as much as $10,000 in latitude to discount prices, sales people vigorously poke around to find the maximum price that will entice you to “drive off the lot today!” $10,000 is a lot of negotiating room! I’ll guarantee you that a customer that needs to drive off the lot today because their old car is broken down will receive less of a discount relative to a thrifty customer (ok, that’s me) that pits one dealer against another and is willing to wait for the lowest price. Additionally, auto manufacturers regularly run “limited time” promotions offering $500 - $2,500 rebates. There are a lot of pricing issues in the automobile industry.

Over the past few years, the Super Bowl events in my world of pricing have squarely been in the U.S. automobile industry. Many consumers could not resist the temptations of zero percent financing and my personal favorite, offering “employee pricing” to everyone (we’re all employees!). What outstanding deals! As profits plunged, business pundits wagged their angry fingers at the Big Three Detroit automakers’ pricing strategy. Quick to go on the defensive, the Big Three pledged to adopt more of an everyday low price (EDLP) strategy with limited negotiating room and restraint on “cash back” promotions.

And while some of these efforts have paid off (e.g., setting MSRPs closer to actual prices has helped attract Internet customers that do searches on vehicles with specific price parameters – customers not knowing there is $10,000 of “wiggle room” may eliminate a vehicle during their Internet research), for the most part these new pricing initiatives have failed. Whenever inventories creep up or analysts become anxious, the Big Three turn to their trusty inventory mover weapon: discount prices.

The real problem for the Big Three is excess supply. You may be selling a highly desirable product, but if your stock room is filled to the brim and your boss is screaming “Sell! Sell! Sell!” because more inventory is on the way – plus you face the added pressure of negotiating against rival dealers in the same excess supply environment, what’s a dealer to do? We all know the answer …cut price to move inventory.

The obvious remedy, of course, is to bring order to the market by reducing supply and increasing prices. Unfortunately it’s not that simple. As Neal E. Boudette and Joseph B. White point out in their January 8 Wall Street Journal article titled “At GM, Curbing Inventories Calls For Juggling Act,” the Big Three have to generate large amounts of cash to fund their platinum health care and pension plans for retirees. These large annual expenses, coupled with iron clad union agreements, force automakers to produce and sell high volumes of vehicles.

So let me amend my pricing friend’s “it’s your strategy, not pricing” exhortation for the Big 3: while there’s certainly room to improve your pricing, your primary problem is related to strategy.

On another note, thanks to Mary Kay Buysee and my friends at the National Association of Senior Move Managers for their kind testimonial on the speech I gave at their conference last weekend!

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