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It was thirty years ago today …The Reprise

August 21, 2017 by ·

For those who missed the first article, here it is: It was thirty years ago today ….

Re-cap from previous episode. Compaq had the perfect pricing trifecta which is to:

  • beat the competition in delivering demonstrably superior value for money both at list price and end-user price level;
  • provide increased channel discounts for improved channel profitability with clear vendor-channel demarcation;
  • and more co-marketing dollars and support to squeeze the competition out of the channel’s marketing efforts.

The second lesson was that you need to be able to update your pricing strategy and that pricing strategy update should strongly influence – and if necessary change –  your product strategy. Pricing before product.

If you haven’t read Rod Canion’s book “Open – How Compaq ended IBM’s PC domination and helped invent modern computing”1. I highly recommend it. It was enjoyable and enlightening.

What other pricing lessons are there from Compaq’s early history?

Lesson #3 – Maintain a level playing field for the channel: keep pricing flat across the board. Don’t favor the big or – even worse – noisy players with extra discounts and/or disproportionately more of your resources. A good example of this is the Businessland case outlined in Rod’s book (p152-6)1

Lesson #4 – Cover as many price points in your growth markets as possible, but at the same time, don’t neglect customer value and the competitiveness of your product costs. And don’t conflate having a low product cost with best customer value.

Lesson #5 – Get away from speeds and feeds, and articulate a more economically-driven value proposition, one which resonates with customers. Ensure that the value proposition is memorable and snappy enough for the CEO to (want to) cite it.

Lesson #6 – Don’t react to the competition using pricing alone; make pricing the last lever used – and use it sparingly. A large part of pricing is making sure that pricing is the last lever that’s being pulled, not the first. This is why Pricing – as a cross-functional process – uncovers lots of non-pricing issues. Good Pricers check to see if everything that can be done has been done before that expensive pricing lever is pulled.

Lesson #7 – When you do need to be aggressive on pricing, be aggressive. If you are going to get aggressive on price, make sure you know what the end-game looks like before you start. A simple first step is to understand how you would expect the competition to react to your aggressive pricing. Are you trying to provoke a response or not? And if they do respond, what will you then do? You need to think this through before you start.

Pricing is referred to only 12 times in Rod’s book. This reflects an approach in which pricing was used sparingly partly because Compaq could choose to do so. Its price positioning – as described in what I called the perfect pricing trifecta – was well-thought out and robust such that it didn’t wasn’t overly reliant on pricing to succeed.

So here is, without further ado, the Compaq UK price list for portable units from June 1987. Remember that these are list prices in £’s but as luck would have it, a remarkably similar number to what you would have paid as an end-user in US$:

It’s worth noting that it appears that the original Compaq Portable was still on sale in June 1987, 4 years and 3 months after it was first announced, albeit it in small numbers. Very different from today’s brutally brief product cycles.

From a pricing perspective though, the basic Compaq Portable did give the list price the overall perception of a lower starting-at-price (SAP) (£1,895) than it would have done without it (£2,295). Arguably the Compaq Portable II Model 2 also helps lower pricing perceptions because the first portable with meaningful storage capacity – which in 1987 meant a 20MB fixed disc drive – was the Portable II Model 4 at £3,150.

People often ask me if prices should end in a -9 or a -5, and I tell them not to worry about the last digit, but worry about the first. Focus on the digits from left to right. That’s Lesson #8.

Of course, the SAP isn’t what people buy, but it is the tag-line that the sales person will use, be shown in the ad, be in the first – or perhaps even better, the last – paragraph in that press review, be in that headline on the internet, etc. So it is very important in driving perceptions. That’s what takes place in the first quarter of the game. The real game though takes place in the final quarter: how far and how easily can you move customers up the solution stack …..

And here are the portable options:

 

So I still have my Compaq leather carrying case – albeit from a slightly later era – which I still use to today.

Any there any more pricing lessons to be learnt from Compaq’s early years? The products may be old and technologically obsolete now but the pricing ideas behind them are not. Here are a few more.

Lesson #9 – Plan your price moves. You can, and should, plan your business around your pricing roadmap. Your pricing roadmap should also be integrated and into all your integrated, synchronized, functional planning cycles: product planning, demand planning, cost planning, supply planning, financial planning, opex planning, etc.

It’s also worth noting that up until 1990 Compaq rarely gave any additional discounts to customers. Let me repeat, no end-user discounting. In the UK, only two customers got additional end-user discounts. One was Compaq’s largest customer worldwide. From 1987-1991, we only had one product promotion that I can recall. All other pricing was managed through changing the list price. That also made life simpler and easier for Sales and the channel: don’t worry about asking for a discount because you won’t get one: focus on selling the value. Which was great while it lasted! So Lesson #10 – Make your list price do as much of the heavy lifting as possible, then use limited, customer-specific discounting to do the rest.

Competitive price pressure did build-up during 1990 which was partially self-inflicted because of the pricing and margin umbrella that Compaq was providing to new entrants to the market. We were finally forced to offer more and more end-user discounts. The storm clouds were looming.

I hired a high-school leaver to develop a bid-tool application for … well, me. It integrated the Excel-based UK price list and the monthly Lotus 1-2-3 corporate cost file and allowed me to quickly create a customer-specific portfolio of configured solutions so I could then play around with the discounts and X-rates, analyze the product mix and identify deal opportunities. In short, we started to crank out lots of deals. If we were going to go down – and at the time it did feel like that was a distinct possibility – then we weren’t going to go down without a fight.

Paul Charlton is the owner of The Pricing Factory®, a pricing consultancy. He can be can be reached at paul.charlton@thepricingfactory.com

1 “Open – How Compaq ended IBM’s PC domination and helped invent modern computing” by Rod Canion, Benbella Books Inc, Dallas, Texas, USA. 2013

 

Filed Under: Compaq, Compaq Pricing Strategy, Compaq UK, Price Leadership, Price War, Pricing Lessons, Pricing Strategy, Pricing Trifecta ·

Pricing: which other discipline would give you a B+ for being smart enough to be a “Don’t Know”?

April 19, 2016 by ·

SKP - Price Underestimation 1280x720Knowing that you “Don’t Know” – and having the courage to admit it – can often be a very smart option. The best option – rather obviously – is to be able to calculate the correct answer, but in many situations including this one, the next best alternative is to know when you don’t know and be prudent enough to say so. In this case 17% of the respondents in this research would – in my view – get a B+ for being smart enough to admit that they “Don’t Know”. Let me explain.

If most people had answered this simple question correctly the “Don’t Knows” wouldn’t get a B+. They would just get a F for not getting the answer correct because the realistic expectation would be that they should be able to get it right, after all, most people did. But in this case only 4% of respondents got the answer correct so the expectation is very different.

And before we go any further – given that 79% of the respondents attempted to estimate the answer and got it wrong, of which 75% of them got it “strongly” wrong – I think it might be worth interjecting that there is an exact answer to the question posed. You know like 2 + 2 does have a unique and exact answer, which, by the way, isn’t 3 which sounds ridiculous to say it, but that’s not dissimilar in business terms from what the majority of the respondents in this research came up with when answering this simple pricing question.

Now let’s contrast the B+ execs – the “Don’t Knows” – with the 75% who thought that they knew the answer while they clearly didn’t, yet nevertheless guessed wildly and – as it turned out – inaccurately at the answer. Before we do though let’s also note that 74% of the 75% “strongly underestimated” – and only 1% “strongly overestimated” – the impact of a price reduction. That’s a hugely significant bias.

And what’s the consequence? Well, the 74% will be much more likely to cut prices which have a hugely negative impact on their own business and also probably run the risk of inadvertently starting a price war with negative consequences for their entire industry. That’s why I’d grade them an “F”: the consequences of strongly underestimating the answer to this question in business are serious and far reaching.

This reminds me somewhat of Joe McNally, country manager of Compaq UK, who was somewhat anxious at the prospect of hiring another MBA who might think that they knew everything but in fact didn’t. And I think this excellent research from Simon-Kucher & Partners shows why he was right to be worried. His encouragement to me on my first day at Compaq was, “If you don’t know, just say you don’t know. No-one will mind.  We far prefer you say that you don’t know than you pretend that you do, and screw it up for everyone”. Wise words indeed.

 

Filed Under: Marketing, Price War, Pricing, Pricing Expert, Pricing Expertise ·

The Accidental Price War – How Do You Try To Stop a Competitor’s Inadvertent Move From Turning Into A Fully-fledged Price War?

August 19, 2015 by ·

Man playing chess with monkeyDon’t react with your pricing and follow them. You need to try and avoid following their price down at all costs; it’s a negative sum game; it’s the primrose path. Take a pill, lie down and re-read Chapter 11 of “The Strategy & Tactics of Pricing” 5th Edition by Nagle, Hogan & Zale. This doesn’t directly cover what to do in the event of an inadvertent price move which could lead to an unintended price war, but it will help you develop the framework within which you will need to make your decisions. Before you respond, you will need to think through how the competition will respond to your response, how you in turn will respond to that, and so on. The extra twist is how you think that they made the mistake – the inadvertent move – in the first place. Will a response just compound the problem by pushing your competitor to make more or less the same mistake again? Another reason for not responding.

Put out feelers to find out the extent of their communications to customers and channel partners; check out their website, industry press, and social media. Monitor the situation. Be extra vigilant. Increase the frequency of your competitive monitoring.

In the first case that I mentioned in my previous blog, following the competitor’s downward price move would have more likely make it difficult for them to see that they had made a mistake in the first place. Competitor premiums would have returned to their “normal” level. Monitoring competitor premiums would have been the one, and perhaps the only analysis that they were performing. You’re starting to get more insight into what metrics they do and do not monitor. Useful. Following them down and normalizing the premiums would reduce the probability of them noticing and correcting their error. And this is what you want them to do, notice that they made an error and correct it.

In the second, it was in a way gratifying to note that all our competitors had ignored our super low pricing. Remember, our list prices were lower than everyone else’s street prices (list minus average discount). All our competitors had ignored our pricing. Not some of our competitors, all of them. Not some of pricing, all of our pricing. There was no mention of our super low pricing anywhere in the press or online. It was as if our prices hadn’t existed. This was good news. They – we – somehow hadn’t trashed the margins in the industry. It left the door open for us to raise prices and remove a potentially destabilizing threat to the profitability of the market.

In the third, not raising prices in the face of a weakening local currency would have made us miss our US$ financial targets and also – because the competitor premiums would have been “normal” – there would have nothing to indicate to our competitor that might want to consider raising prices too. We had to raise prices, and keep on raising them, even if they didn’t.

So how did these situations resolve themselves?

Filed Under: Marketing, Price War ·

The Accidental Price War – How Can You Tell If It’s Accidental?

August 5, 2015 by ·

Man playing chess with monkeySometimes competitors make price moves which have the potential to start an price war. But how can you tell if the move was deliberate or not? This is critical because you will need to respond to those situations very differently. Well, you can’t immediately tell for sure in all cases, but there are some tell-tale signs. In one case I came across a competitor which had reduced prices across the board in a large market in a region where it had its largest market-share and more importantly its highest relative market-share (their market-share/our market-share). I investigated this very discreetly with a few key regional team members and to see if our competitor had been communicating anything to customers or the channel, and they had not. If this was intentional there would have been some sort of communication out there otherwise they would not have been able to fully leverage the price move. As we pondered on our competitor’s motivations (as we always did), we couldn’t find a single reason why anyone with a pulse would intentionally attack on price where they had their largest relative market-share, and concluded that they had done this unintentionally.

In a second case, I started working with a small division in a company and I realized that its products were massively under-priced compared to the competition. It’s list prices were lower than the competitors’ average discounted prices (street price). Not just one competitor, all of them. Think about that: list prices lower than competitors’ street. That effectively it had created the potential for a price war without even realizing. And because it didn’t realize this – it was still growing more quickly than all the other divisions in the company which had helped it evade internal scrutiny – it hadn’t fully taken advantage of its aggressive price position.

In a third case, one of our major competitors didn’t raise prices as that country’s currency declined in value rapidly against the US$ during the 2008 financial crisis. As we – and our other competitors in this US$ denominated industry – raised our prices across the board three times, this one competitor did nothing. We observed this for about nine months and they still didn’t move. Nor did they try to take advantage of their aggressive price position; there were no communications to customers or the channel. They didn’t have an uptick in sales or market-share. They were asleep at the wheel.

So how do you try to stop a competitor’s inadvertent move from turning into a fully-fledged price war? More to follow.

Filed Under: Marketing, Price War ·

Who Started the Price War? 88% of companies said it was someone else …

July 30, 2015 by ·

Man playing chess with monkey 88% of companies said it was someone else who started it.

Only 5% reported that they started it on purpose.

And 7% said that they started it accidentally.

It seems highly probable that many of the 88% actually started the price war without realizing it …. or maybe are in denial.

Have you ever started a price war by mistake?

Presented at the Professional Pricing Society Conference in May 2015 by Prof. Dr. Dr. h.c. mult. Hermann Simon (Source: Simon-Kucher & Partners Global Pricing Study 2014)

Filed Under: Marketing, Price War ·

Are you involved in a price war? 59% of companies said “Yes”.

July 27, 2015 by ·

Man playing chess with monkey •  59% of companies reported that they are currently engaged in a price war.

•  19% reported that there is a price war, but that they are not involved.

•  Only 22% reported that there is no price war.

Presented at the Professional Pricing Society Conference in May 2015 by Prof. Dr. Dr. h.c. mult. Hermann Simon (Source: Simon-Kucher & Partners Global Pricing Study 2014)

Filed Under: Marketing, Price War ·
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