Pricing in Retail & CG

advanced seriesFoundation

Preserving margins and boosting demand

CONSUMER GOODS & RETAIL 4

PROBLEM DRIVEN RESEARCH

2013 No. 04

Pricing management

IE FOUNDATION ADVANCED SERIES ON PROBLEM-DRIVEN RESEARCH

foundation

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PRICINGadvanced series

EDITORIAL BOARD

Marco Trombetta Vice-Dean of Research IE Business School

Manuel Fernández NuñezBusiness Development Director Consumer Products & Retail Ernst & Young

Margarita VelásquezGeneral Director IE Foundation

Fabrizio SalvadorSenior Academic Advisor IE Foundation

Alfonso GadeaProject Director IE Foundation

foundation

Dear friends:

One of IE Business School’s goals is to be an international

center of excellence for research in all areas of

management. We pursue this goal in close collaboration

with the IE Foundation and the recently established IE

University.

I would like to present a new initiative of the IE Foundation

and IE Business School. We hope it will provide an

innovative way to share the results of the joint work of

our scholars and partner organizations.

The initiative, “IE Foundation Advanced Series on Problem Driven Research”, aims to provide

support to organizations facing the new economic structure, featuring unique market rules.

Recognizing the importance of retailing for assessing the current situation and the social

expectations, we have chosen the “Consumer Goods & Retail” series as our maiden work.

The IE Business School seeks to create an environment where we can develop the best talent,

while at the IE Foundation we seek to close the loop between the school and businesses by

fostering sustainable relationships through the organization.

We are confident that this initiative will meet the challenge and offer a new perspective

on the issues.


Marco TrombettaVice-dean of Research at IE Business School

Vice-dean Coordination and Research IE University

Greetings

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PROFIT569874 2365 1145566

LOSS

6985 32556 45789 3244

BRANDING

6985 32556 45789 3244

MULTICHANNEL

contents

003 221651 165151

MANAGEMENT

6985 652114 54654

PRICING

Lead researcher

IE Foundation cover letter

Ernst & Young cover letter

Executive Summary

Importance of pricing management

Managing prices in a downturn2.1 Tactics: Speed is crucial, but so is control

2.2 Products: Selective management of product-level prices

2.3 Strategy: How low can you go?

Multichannel pricing management3.1 Channel-based price differentiation

3.2 When to differentiate prices

3.3 Price matching

3.4 Open-ended questions

Ernst & Young viewpoint


Acknowledgements We would like to thank the Consumer Goods & Retail sector professionals who gave up part of their valuable time to help us with this study through the pricing management surveys.

01

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Lead researcher

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Martin Boehm is the Dean of Programs and

Professor of Marketing at IE Business School in

Madrid. He previously served as the Associate

Dean of Undergraduate Studies at IE University

and the Associate Dean of the Master in

Management at IE Business School.

Martin’s intellectual interests center on Customer

Management. His research provides managerial

implications on how to build profitable and

long-lasting customer relationships. His primary

concern is to quantify the impact of various customer management activities on

a customer’s lifetime value – the net present value of the stream of future profits

expected over a customer’s lifetime. At the same time, he develops analytical

models to estimate or approximate a customer’s lifetime value. As a consultant

he works primarily with firms in the financial services industry to provide them

with a roadmap for growth.

Martin is teaching across IE’s Master in Management, MBA, Executive MBA, and PhD

programs. Prior to joining the IE Business School faculty, he studied International

Business at Reutlingen University of Applied Sciences and received a Master of

Business Administration from the Australian Graduate School of Entrepreneurship.

He completed his academic education with a Doctorate in Marketing which he

obtained from the Johann Wolfgang Goethe-University in Frankfurt.


Prof. Martin BoehmDean of Programs and Professor of Marketing at IE Business School

Among its primary activities, IE Foundation supports the research and the knowledge sharing endeavors of IE Business

School’s professors. Through its initiatives IE Foundation contributes to the positioning of IE Bvusiness School as

a center of excellence for innovation, and for the creation of knowledge targeted at its productive environment.

The IE Foundation aims to create strong ties and alliances with prestigious, public and private, institutions, particularly

those in the business domain that can help propel our researchers’ initiatives. As an institution that pursues

excellence, research activities are driven by academic rigor and the utilitarian nature seeking to create knowledge.

We aim to push innovation and competitiveness to provide answers to the challenges and needs of society.

This publication is part of the IE Foundation’s collection on Consumer Goods and Retail, developed in collaboration

with Ernst & Young. We would like to extend our gratitude to them for their commitment and their vast experience

on this matter.

The collection has been designed with the purpose of analyzing the key aspects of the industry through a practice-

driven, up to date perspective on key aspects of the industry such as Sustainability, Information Security, Pricing,

and Profit Protection. We are in the midst of a major change in the retail industry. The challenge many Spanish

organizations face, is being at the forefront of such change and benchmarking best practices in the global market.

The IE Foundation looks forward to helping organizations in this process.

We hope that this publication will be of interest to you, and we appreciate your support.

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Rafael PuyolVice-President, IE Foundation

Margarita Velásquez Director General,

IE Foundation

foundation

Consumer Products and Retail companies are developing their business in a much more

complex and volatile environment than they have in the past. In this environment,

companies’ actions focus on transforming their business processes and protecting their

operational margins.

In its commitment to innovation and value creation, Ernst & Young has propelled research

projects on the issues that will help companies deal with today’s industry challenges.

Our research takes into account different actions regarding price dynamics from a brand

differentiation perspective. Secondly, we take on the negative economic effect of shrinkage

with an analytical approach, to identify its root causes and suggest corrective actions for its

mitigation (profit protection). We also seek ways to preserve the information security of an

industry that operates, with an increasing frequency, in mobile scenarios and technologies.

Finally, we propose the adoption of a business commitment perspective, betting on

sustainable initiatives from retailers that take into account manufacturers and consumers.

These four areas are experiencing a large change in process. Ernst & Young and the IE

Foundation are approaching these challenges from an innovative perspective with the

intention of putting them into practice and creating value for the business environment.


José Luis Ruíz ExpósitoPartner and Head of Consumer Goods & Retail Manuel Fernández Business Development Director Consumer Goods & Retail

Executive SummaryIE F

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Before companies can attempt to improve profit by raising

or lowering prices, they need to know what consumers are

willing to pay. Unfortunately, most executives don’t have

the knowledge to make an informed decision. As a result,

management teams often take the easy road; they resort to

cutting prices. A sudden and prolonged drop in prices changes

customer and competitor behavior. Companies have to act

quickly, even though solid information is hard to come by.

However, pricing decisions made now are likely to affect

consumers’ perceptions for a long time to come.

In a recession, pricing must be managed on three levels: create

a pricing strategy that is aligned with the company’s broader

objectives and positioning, set prices on individual products

and deploy disciplined tactics to manage the aspects of the

transaction that most affect profitability.

As for tactics, successful companies: 1) assess the impact of

pricing moves based on point-of-sale data, and 2) identify

hidden sources of revenue leakage. Discounts offered by

employees in a bid to up market share can lead to hidden

profit leakage. One way for a company to increase its profit is

by managing the “price waterfall,” from list price down to the

transaction pocket price.

Prices should be managed selectively at product level.

Companies should avoid overly aggressive or broad price cuts

when demand is soft. Prices should be adapted for products

that are seeing demand fall. Companies need to identify

demand-sensitive “pockets,” such as customer segments,

product lines or usage.

Prices must be managed strategically. Companies need to

consider where they want their prices to be within three years

and not rely on continual discounts to sustain volumes. Long-

term, continuous discounts hurt the brand. Companies aiming

to set prices strategically must try to anticipate what moves

their competitors will make in the future.

Different segments are willing to pay different prices.

Therefore, price differentiation can be a profitable pricing

strategy. Multichannel pricing has also become a more

widespread strategy among manufacturers and retailers.

Different assessments of channel and price sensitivities can

enable a company to implement channel-based pricing.

Professionals often advocate equal prices across distribution

channels to maintain brand strength. However, the profit

opportunities are too big to ignore.

A range of factors are squeezing business margins, such as decreased consumer spending, increased market transparency via

internet and low-cost competition from emerging industrial powers, like China. Executives must focus on pricing, because

they can no longer rely on sales growth and inflated mark-ups. As companies’ most powerful profit lever, pricing is the most

effective way to boost profits.

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1. Importance of pricing management

Few times since the end of WWII has there been such downward price pressure. Part of this pressure is the result

of economic factors (e.g., recession in western economies and Japan), which have dampened consumption.

However, pressure is also stemming from new sources. The sharp increase in purchasing power of retailers like

Wal-Mart or Mercadona places pressure on suppliers. Meanwhile, internet has increased market transparency,

making it easier for shoppers to compare prices. China and other emerging industrial powers are also playing

a big role, as their lower unit labor costs have lowered the prices of manufactured goods. The double cycle-

price whammy has eroded companies’ price-setting power, causing executives to look all around for ways to

maintain margins.

A Global Pricing Study, co-directed by IE Business School, shows that 93% of Spanish companies have faced

increased pricing pressure over the past two years.


Main reasons:• Customers demand higher discounts (53%)• Lower-price competitors / new market entrants (50%)

Figure 1: Dramatic increase in pricing pressure

93%

93%

90%

89%

86%

83%

82%

82%

81%

81%

80%

71%

Poland

Spain

France

Belgium

Japan

UK

US

Brazil

China

Italy

Switzerland

Germany

More aggressive customers and competitors. More than 9 out of 10 companies feel increased

pricing pressure.

Source: 2012 Global Pricing Study. Simon-Kucher & Partners, IE Business School, Alimarket

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Specifically, our study on Spanish companies in the Consumer Goods & Retail sector shows that the majority are operating

in an industry with falling market prices. 76% of those surveyed said that prices in their industry have fallen in the last

year. 21% even said prices had fallen by more than 10%.

Stiffer competition is one of the key drivers behind the declines in prices in various sectors of the Spanish economy. Most

of those surveyed in our study said they are doing business in an increasingly hostile market environment. Competition

is not focused on margins. Rather, companies are fighting fiercely for volumes and market share.

Figure 3: How would you assess your environment / company?

Figure 2: How have average prices in your sector changed in the last quarter compared to the year before?

Source: own research


Competitors with aggressive pricing strategies

++ Price + Price Breakeven + Profit ++ Profit

Competitors focused on profit maximization

55%Slight decrease (between 0% and 10%)

21%Considerable decrease (between 10% and 20%)

21%Slight increase

(between 0% and 10%)

3%Stable


These statistics illustrate the potential impact of optimum pricing on a company’s net revenue. A small shift in prices can

cause a large shift in income. Nevertheless, before attempting to increase profit by raising or lowering prices, companies

need to understand and anticipate how consumers will respond to a change in a product’s price.

It’s too bad that so many companies seem to be unable to appreciate a consumer’s willingness to pay the optimum

prices. When asked if they were “well informed” about six potential factors in pricing, the executives of a leading US

multinational said:

Figure 4: % of well-informed executives about...

84%

81%

75%

61%

34%

21%

Variable costs

Fixed costs

Competitors’ product prices

Value attached to the product

How customers would react to a change in prices

Willingness of a customer to pay different price levels

Executives need to focus more on prices now than ever

before. They can no longer count on the double-digit sales

growth and wide margins they had in the 1990s to cope with

a price deficit. What’s more, many companies just can’t lower

operating costs any further. As a result, pricing is one of the

few levers they can still tap to increase revenues. Those just

starting out now should be poised to reap the full benefits

of the recovery when it comes.

Appropriate pricing is the fastest and most effective way to

increase profit. Taking the average income statement of S&P

1500 companies, a 1% increase in prices would result in an

8% increase in operating profit assuming volumes remain

unchanged. The impact is nearly 50% greater than that of a

1% decrease in direct variable costs (e.g., raw materials, direct

labor) and three times the impact of a 1% increase in volume.

Regrettably, there is also a downside to pricing. A 1% decrease

in average prices has the opposite effect, ceteris paribus,

reducing operating profit by the same 8%. Executives may

hope that lower prices will lead to higher volumes and offset

the lost revenue, but that doesn’t usually happen. Continuing

with our study of typical S&P 1,500 figures, volumes would

have to increase by 18.7% to make up for the impact on profit

of a 5% price reduction. Such a degree of demand elasticity

to decreases in prices is rarely seen. A price-cutting strategy

to raise volumes and, by extension, profits is destined to fail

in any market or industry.

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These executives were well informed about

the costs of their products and the prices of

competitors’ products. They were well informed

about the products’ value. However, they did not

know enough about customers’ willingness to pay

or their response to potential changes in prices to

set optimum prices. Experience shows that this

company is not alone.

In the same vein, our research on Spanish companies

indicated that less than half based their pricing

strategies on using the willingness-to-pay function.

The majority (67%) follow a simple cost-base

approach. However, a pricing strategy based on costs

results in either lost profit or out-of-market pricing.


67%

52%

44%

A mark-up on product costs

Relation with competitors’ prices

A function of elasticity or the customer’s willingness to pay

Figure 5: What pricing approaches does your organization apply to set prices for clients? (multiple choice)


Similar research shows that executives view price-related issues as a real headache. It appears that prices

cause more headaches or sleepless nights than any other marketing decision.

This report is designed to reduce some of Spanish companies’ headaches and more pressing issues. Two issues

that most companies are dealing with are the economic environment and the advent of internet. In the following

pages we offer some tips on how to tackle these two issues.

Question: What is your biggest concern?

Figure 6: Pricing complexity Prices give marketing directors headaches

Prices

Product differentiation

Product quality

New competitors

Distribution

After-sales service

Advertising

4.3

3.8

3.5

3.4

3.0

2.9

2.6

Source: The Strategy and Tactics of Pricing - Pricing and the Bottom Line, Martin Boehm

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2. Managing prices in a recessionConfronted by weakening sales and excess capacity, management teams often resort to cutting prices. It’s easy to

see why. Price cuts are quicker and easier to implement than, say, introducing new products or improving service

levels. Customers often respond immediately to lowered prices. A swift uptick in sales can reinforce executives’

belief that they did the right thing.

But there’s a reason promotional price cuts are sometimes called “management heroin.” Price cuts are addictive.

Customers quickly develop a craving for big discounts and an aversion to full prices. Companies grow accustomed

to the boost in volume and hesitate to raise prices to previous levels for fear that revenues will crater. In a deep

recession, when the first goal is survival, some businesses have no option but to cut prices aggressively. But even

relatively strong companies experiment with heavy discounts and then wake up to find themselves hooked.

Is there an alternative? The truth is, most companies do need to lower prices in a downturn, whether they sell primarily

to businesses or to consumers. Demand is down, yet fixed capacity and costs haven’t changed much. So the laws of

supply and demand exert strong downward pressure on prices. Still, the range of outcomes can vary widely in both

the short term and the long term. What matters most is how effectively companies manage pricing.


Unfortunately, yesterday’s pricing textbook isn’t

much help with today’s conditions. A sharp, prolonged

downturn creates a volatile new environment, altering

the behavior of both customers and competitors.

Companies have to act quickly, even though solid

information is hard to come by. And pricing decisions

made now are likely to affect consumers’ perceptions for

a long time to come. Few companies in any industry can

say, “We’ll lower prices today and raise them tomorrow,”

at least not without risking a severe customer backlash.

In our experience, companies that get pricing right

manage it at three levels. They create a pricing

strategy that fully supports their broader objectives

and positioning. They set prices on individual products

to reflect value to both buyer and seller. And they

deploy disciplined tactics to manage the aspects of

the transaction that most affect profitability. A severe

downturn presents challenges on all three levels. Pricing

strategy must address stark differences between the

right short-term answers and the long-term health

of the business. Pricing of individual products need to

reflect dramatic changes in the ways customers make

purchasing decisions. Tactics must be carefully designed

and choreographed to let companies execute quickly

without losing control.

In a normal business environment the best course is

almost always to map out your strategy first, then to set

prices for individual products, and finally to design the

suite of tactics that will allow you to execute profitably.

But in a recession, time is compressed and tactical

decisions take on new importance and urgency. So, we’ll

start there.

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Customer behavior, market and competitors’ actions can all change quickly

in a downturn. Executives find that previous assumptions are obsolete and

they act faster than ever to adapt. But when companies accelerate tactical pricing

moves without accurate information about the real effects of those moves, they can lose control of the prices

customers actually pay. The most effective companies typically take two steps to avoid this danger: (1) they quickly

assess the impact of pricing moves by gathering lots of fast, fresh point-of-sale data, and, (2) they maximize control

by identifying and managing the hidden sources of revenue leakage. Most companies rely on a host of discounts,

promotions and other pricing tactics to boost sales and earnings. In a downturn, it becomes essential to analyze

which really work and which waste money.

The actions flowing from this kind of analysis not only shore up the bottom line, they also lay the groundwork for

more effective pricing in the future. One specialty retailer, for example, carried fifty thousand SKUs per store –as

much variety as a large supermarket- and relied on promotions to drive a significant portion of sales. When the

retailer put its promotions under the analytic microscope, however, it found that discounts on some items had

virtually no effect on sales. It also discovered that some forms of promotional pricing were far more profitable

than others, even if the costs were similar. Customers loved two-for-the-price-of-one offers, for instance, yet were

less impressed with 50%-off sales.

The retailer also has relearned the importance of seasonality in pricing tactics. Discounting a highly seasonal

product –patio furniture for instance- at the very beginning of the selling season typically attracted a large number

of shoppers looking for bargains. Discounting the same item at any other time of the year was essentially fruitless,

Speed is crucial, but so is control

Tactics2.1


because shoppers were more willing to pay full price.

After analysis, the store modified or eliminated only

10% of its promotions overall. But that 10% yielded

a boost in profitability of 15% to 20%, while sales

volume declined less than 2%.

The faster you can gather this data and act on

it, the more likely you can stay in touch with

changing customer needs or preferences.

One food-products company, for instance,

built quantitative tools that analyzed

sales data from competitors along with

its own operations every week. Managers

could track the relationship between price

points and volume and spot the gaps between

the company and its competitors. They linked

promotional tactics to sales volume, compared actual to predicted

results, and adjusted their demand models on a weekly basis. In an industry

where monthly sales data and quarterly adjustments were standard, the weekly

data helped the company adapt much faster than competitors to changing

conditions.

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Our study of Spanish companies showed that the vast majority (88%) collected data on competitor prices. Both

of the examples above provide clear evidence that companies need more detailed analysis of their promotional

activities. Our study paints a much different picture:

Figure 7: Pricing and promotion practices

We study the impact of price thresholds and rounding on

customers

We use data-gathering tools regularly to determine whether

prices are competitive

We use data-gathering tools regularly to determine perceived

value among customers

We have pre-defined volume/margin targets for promotions

We estimate the expected return on promotions through market/

consumer testing

Completely disagree

Somewhat disagree

Neither agree, nor disagree

Somewhat agree

Completely agree


Question: Indicate to what extent the following statements apply to your company.


Less then 30% of those surveyed said they measured

the impact of promotions on profit. This suggests

Spanish companies need to hone their price-setting

skills if they want to remain competitive in an

increasingly global market.

A downturn increases the pressure on employees to

chase or protect volume at any price. Freight terms

given by the logistics department, credit terms

authorized by finance, free services and accessories

authorized by customer care agents -all can create

layers of overlapping discounts and hidden leaks that

drain away profits. The faster and more aggressively

you move on pricing tactics, the more important it

is to reassert control.

A European machinery manufacturer did just that,

with remarkable results. Like many producers of

complex products, this company typically realized

net prices that were about 55% of list. But those

discounts came from a wide range of sources. A

product costing €100 might carry several on-invoice

discounts totaling €35. Off-invoice terms or incentives

might be worth another €10. Managers had no way

of identifying why a particular product was selling

for less than list, and had little control over which

people in the organization were authorized to provide

discounts. Front-line salespeople in particular offered

substantial incentives without oversight by senior

management.

To address the issue, the company sent out a

short e-mail survey to its sales force asking about

their discounting and contracting practices. The

survey results, along with input from the finance

department, allowed managers to simulate the

impact of promotional activity and establish

guidelines to maximize return on investment. The

company also built tracking systems to capture off-

invoice trade spending and aggregate the data at

the account level to ensure that the company was

investing in the most valuable accounts. The result

was an increase in earnings before interest and taxes

of nearly 20%.

Maintaining control of pricing execution requires

clear direction to front-line employees about what’s

allowed and disciplined processes to find and

remedy unauthorized behavior. For big-ticket items,

managers need to set clear guidelines for sales scripts

and allowable price ranges. They need to have a well-

developed escalation process for decisions that fall

outside company pricing guidelines.

Managers can also ratchet up discipline by tying

both sales force and channel compensation to price

realization. It’s hard enough maintaining margins

even in the best of circumstances; in a recession

no company can afford uncontrolled discounting

(see section on “price waterfall” for managing

uncontrolled discounts).

advanced series

Many companies don’t get a good grip on the broad

range of factors contributing to final transaction

price. The table below shows price components for a

typical sale by a linoleum asphalt manufacturer to a

distributor. The starting point is the list price. From this,

a discount for order size and a competitive discount are

subtracted, leaving the invoice price.

In most businesses, especially those that sell products

through distributors, the invoice price does not reflect

the real amount of the transaction. There are still several

factors that come into play between the invoice price

and the final cost of the transaction. These include:

discounts for early payment, for volume purchases

and cooperative advertising. When the lost revenue

caused by these specific elements of the transaction

is subtracted from the invoice price, what’s left is the

“pocket price” (or final price): how much revenue is really

left in the company’s pockets after the transaction. The

pocket price, not the invoice price, is the fair measure

of the price attraction in a transaction.

The table below shows the revenue in the price

waterfall from the list price to the invoice price and

to the pocket price, or the pocket price waterfall. Each

element of the price structure represents lost revenue.

A 22.7% decrease from the invoice price to the pocket

price is not out of the ordinary. Studies show an average

decline between the invoice and pocket price of 17%

for packaged consumer goods companies, of 18% for

chemicals companies, 19% for IT companies, 20% for

footwear companies and 22% for car makers.

Companies that do not manage the entire price

waterfall actively and, as a result, suffer from multiple

and highly volatile revenue leaks, miss out on any

opportunity to achieve better pricing.

Figure 8: Each element in the price waterfall represents a revenue leak

(euros per m2)

22.7%off-invoice

The price waterfall

6.00€

Manu-facturer’s list price

6.00Order discount

0.12Competitive discount

5.78€

Invoice price

0.30Discount for payment terms

0.37Volume rebate 0.35

Off-invoice promo-tions

0.20Cooperative advertising

0.09Freight

4.47€

Pocket price

PRICING


Pocket price band: At any given point in time, the

pocket price of an article is not the same for all

customers. Rather, articles are sold within a range

of prices. This range, for a unit volume of a specific

product, is called the pocket price band. The following

chart shows an asphalt manufacturer’s pocket price

band for a single product. There is a 35% difference

between the highest and lowest priced transactions.

This pocket price band may seem wide, but much wider

bands are commonplace.

Understanding the variation in pocket price bands

is essential for a company to exploit the best pricing

opportunities of a transaction. Executives that can

identify a broad pocket price band and the underlying

causes can manage the band better in the company’s

favor. When prices fluctuate in a range of more

than 35%, one could easily assume that appropriate

management could improve the price by several

percentage points, benefiting the company.

Figure 9: Elements of opportunity to benefit from a pocket price band

(percentage of volume)

Pocket prices (€ per m²)

5.80€ 5.005.40 4.60 4.005.60 4.80 4.205.20 4.40 3.80

2.7

5.0

10.7

6.6

13.4 13.114.2

10.1

15.0

6.1

3.1

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PRICING

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Productos2.2

Selective management of product-level prices

Falling demand in turbulent times triggers

a cascade of list-price declines and deep

discounts off list. Yet many companies

lower prices too aggressively or too

broadly because they fail to answer two

key questions: Why is demand falling? and

where is it falling most? Answering these

questions requires managers to get inside

their customers’ heads.

In a downturn, some consumers and

businesses cut back because they just

don’t have the money to spend. Many more

prospective customers have the money but

feel uncertain about the future. Both factors

show up in the price declines that hit the

transportation sector, for example, where

average prices fell roughly 13% in the first

few months of 2009. So, which factor should

get the greatest attention?

Spooked consumers won’t buy more until

they feel that it is safe to do so, or until

they decide that prices have dropped as

far as they’re going to. A company needs

to understand its customers well enough

to know which of these factors is more

important. If your customers can afford to

buy but are nervous about doing so, lowering

prices may not be the right way to help them

overcome inertia. Rather, companies can

find ways-by combining pricing with other

marketing efforts-to send the message that

buying is a low-risk decision.

Take cars, for example. Plummeting

employment doubtless contributed to the

sharp drop in auto sales in 2008 and early

2009. But fear of job loss probably kept

many more potential buyers out of dealer

showrooms. Cars are a big-ticket item, and

most customers can delay purchases by a

year or two.

In response, auto companies typically

slash prices in a downturn. Most of the big

players, desperate for sales, did it this time

around. But Hyundai took a different tack.


Recognizing that its customers weren’t likely

to respond to the usual rebates or incentives,

the Korean car maker announced a plan that

would allow customers who lost their jobs to

return a new car. The reasoning: A fully employed

customer can afford the full-price car nearly as easily

as the discounted car. But a customer fearing layoffs is

more likely to hold off on big purchases. The strategy is powerful

because it addresses what goes on inside a customer’s head, not

what goes on in an economics textbook. It carries some risks,

but it is not as risky as watching sales plummet-and indeed,

Hyundai’s sales were up nearly 5% in the first several weeks

of 2009, compared with the same period in 2008. Overall auto

sales, meanwhile, had dropped 40%.

Rather than relying on highly visible across-the-board discounting, sophisticated pricers find ways to lower

average prices in highly selective ways. Almost every company’s business contains “pockets” of real variance in

demand- customer segments, geographies, product lines, occasions of use, and so on. In our experience, most

companies underestimate how many of these pockets can be addressed effectively through targeted pricing.

Faced with a big fourth-quarter sales drop, for instance, L’Oréal recently decided to lure customers with a 20-

ml “petite” bottle of one expensive perfume, pricing it at $55, compared with $175 for the traditional 100-ml

size. The move gave customers a size they could more easily afford but actually created a 57% price hike per

milliliter-$2.75/ml versus $1.75/ml.

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Large companies with thousands of products face a significant challenge in

pricing appropriately for a downturn. But it’s often possible to apply new pricing

rules to categories of products. One European manufacturer of construction-

related products, for example, had tens of thousands of SKUs. To simplify

pricing, it grouped the products into three “buckets.” Bucket #1 included

products that were highly differentiated and that customers valued

highly. Bucket #3 included commodity-like products over which the

manufacturer had little pricing power. In the middle was bucket #2.

The company applied cost-plus pricing rules to each bucket, but

the “plus” was higher for the buckets with more differentiated

or more highly valued products. To gather the necessary data,

the company relied partly on internal statistics and partly

on its managers, who gathered at workshops to run

through lists of products, quickly putting them into one

bucket or another. This approach to variable product

pricing helped the manufacturer raise its earnings

roughly 20%.

A company’s options during an acute downturn

are determined by its strategic and financial

position. A small number of businesses

occupy strong positions on both of

these dimensions and have truly

differentiated products or services,

which enables them to maintain

price levels.

Even then, these companies work hard to deliver

higher value for the same price. That can be as costly as

cutting prices in the short term, but it preserves pricing integrity

for the long term. When Amazon launched the Kindle at $399 in November

2007 ( just before the start of the recession), many analysts thought customers

would balk at the price, especially since the Sony Reader was available for $100 less.

Instead, the Kindle sold out. The Kindle 2, launched in February 2009 for $359, continued

to exceed sales expectations.


Research carried out years ago showed that a hosiery

retailer elicited an “enormous” positive response in

sales by raising its price from US$1 to US$1.14. Appa-

rently, consumers felt the higher price was a sign of

a “higher quality”. Such anecdotal evidence of viola-

tions of downward sloping demand curves had been

observed previously, but dismissed as anomalous.

Yet, evidence continued to mount that price might

have attractive as well as aversive properties. In the

economics-oriented literature, as well as in the emer-

ging empirical tradition in marketing and consumer

behavior, it was becoming increasingly apparent that

consumers frequently employed price as a proxy for

product quality. By the end of the 1908s, based on an

integrative review of over 40 empirical studies, the

evidence for a robust (though moderate) price-percei-

ved quality effect appeared to be incontrovertible.

The theoretical basis for this perception, that higher

prices were associated with higher quality, was less

clear however, since the correlation between price

and “objective” or actual product quality seemed to

be relatively low. Occasionally higher priced options

were found to be of lower objective quality than low-

priced alternatives in the same category. The prevai-

ling wisdom at the time regarding positive price-

perceived quality correlations relied on a cognitive

miser argument. Evaluating more direct (intrinsic)

information about quality across a bewildering array

of products, each with its own unique set of quality

connoting attributes was cognitively daunting, so

most consumers adopted a price-quality heuristic

because it had worked reasonably well in the past.

That is, consumers consciously chose to rely on the

price cut to make quality judgments, because such a

process was cognitively efficient.

Therefore, consumers infer low quality from constant

discounts or low prices. In the long run, constant dis-

counts can damage the brand.

How low can you go?

While most companies cannot easily hold the line on prices this way, it’s

a mistake to lower prices without considering the strategic implications.

We must ask ourselves: Where should our prices be in three years? How will

short-term actions help us or hurt us on the way to that objective? Aggressive,

highly visible discounts, for instance, may cheapen a brand in customers’ minds. It

may persuade customers that they paid inflated prices in the past. Slashing prices also

makes it hard to raise prices when conditions improve.

The price/quality relationship: How lower prices hurt brands

Strategy2.3

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Making the right strategic decisions about pricing can often amount to a chess match. You

must consider the whole board and plan several moves in advance.

Understanding the market positions of competitors and profit pools in the industry is crucial.

But a static view of competitors doesn’t help; you need to anticipate their future actions

based on their share of key segments, relative cost position, capacity utilization, and financial

health. Your industry structure also plays a key role in determining the pricing strategy that

will ultimately maximize your profits. What can you do that your competitors will be unwilling

or unable to copy? As we noted earlier, markets are not monolithic, and there will be pockets

of opportunity created by high share in one segment or low-cost position in another that

allow companies to target the most effective pricing moves. At the same time, companies

must be careful not to destroy the profit pool in their industry.

Consider the case of a company operating in an industry with high fixed costs and weak

competitors. By cutting prices too much, it might risk initiating a price war that is destructive

for everyone. One large real estate owner, for example, determined that, while it certainly

didn’t want to lose share in a down market, it also didn’t want to gain more than a point

or two. Why? Because any scenario in which it gained significant share in the face of falling

overall demand would drive competitors to lower prices so much that its own lease rates

and profits would plummet.

Pricing strategy decisions can amount to a

chess match: we must plan several moves

in advance and anticipate what moves the

competition will make.


advanced series

Our survey of leading manufacturers and retailers in

Spain shows that most companies (60%) believe they

are in a price war.

Price wars have racked industry after industry in recent

years. All too often, there are no winners. No industry is

safe. No company, however well run, is immune. After

all, most price wars start by accident, through some

apparently trivial misreading or misjudgment of market

conditions. Rare is the price war that is initiated as a

deliberate competitive tactic.

In the current market, price cuts are driven by a structural

situation of demand, although in many cases companies

are still looking more at what competitors are doing

when establishing prices than at the new price/value

relationship demanded by the customer. As a result, the

harmful effects of the price war may continue to exist.

In sectors like Consumer Goods & Retail, this situation is

especially acute because of their unique characteristics

and strategic importance. The best way to deal with

price wars is to avoid them altogether and, if this is not

possible, get out of them as quickly as possible.

Pressure on prices: A problem in Spain?

PRICING


In fact, our survey of leading Consumer Goods

& Retail companies showed that most of them

believe the price war was started by a competitor.

This is debatable, since most considered

themselves to be the price leader.

Reckless pricing measures and a strict focus on

volume are two of the main causes of price wars.

There is widespread lack of knowledge of how

much volumes need to increase to make up for

the price cut and an obsession to win market

share, creating a vicious circle of price declines.

Why should we avoid a price war?

Numerous studies show that unless a company has a cost advantage of around 30% over another company,

competing for the lower price is a suicide tactic. Price reductions are almost always copied immediately.

Profits are extremely sensitive even the slightest declines in price levels. Price is the most sensitive lever in business.

A real example can be found in S&P 1000 companies. A one percentage-point decline in price can lead to a 12%

reduction in profit. Suppose a price war causes a 5% decline in price. Given the marginal contribution of 30% (for

the S&P 1000), that means that volume would have to increase by 20% for a company just to break even. This price

elasticity of 4 to 1 does not happen in the real world (a 2 to 1 elasticity is found if we’re lucky).

Causes for unwarranted pricing:

Complicated statistical or mathematical models are not required to analyze the causes of poorly informed price

formation due to the effects of a price war in the traditional sense. Most times, companies get caught up in them

because of misreads or misjudgments of competitor actions and market changes. They are rarely started deliberately.

Studying the misjudgments, we see that what is really happening in the market is the following: a company cuts

prices without disclosing important collateral information (period of the cut and special circumstances) and the

response by the competitor is to also lower prices. And so the price war begins and escalates. Competitor A identifies

competitor B as the one who started the war and vice-versa.

Is you company currently engaged in a price war?

40%No, we are not in a price war

52%Yes, it was started by a competitor

8%Yes, we started it

advanced series

The study conducted by IE Business School showed that 35% of Spanish executives admitted that they are incapable of determining

the right volume growth necessary to offset a 5% decrease in price. The remaining 65% that believe they know the right answer

could be wrong 80% of the time.

The IE Business School Global Pricing Study 2011 revealed a close relationship between a corporate focus on volume and price

wars. Markets characterized by the large percentage of companies focused on volume rather than profit are more likely to

suffer as a result of a price war. Price wars are, therefore, caused not only by external and uncontrollable factors, but also often

because of wrong strategic decisions.

Regarding misjudgments, it is a common belief among company managers that only the lowest-price supplier in a market can

ignite a price war. They are mistaken: The culprit can easily be the highest-priced supplier. Consumers do not simply only buy on

price; they buy on value (V=Benefit-Price). As a result, a premium competitor can start a chain reaction, triggering a downward

spiral in the industry.

PRICING

There is a correlation between the focus of a business on sales volumes and price wars.

However: for Spanish (and Italian) companies, it seems that volume-orientation

is not the only explanation for price wars.

Relationship between the focus on volume and price wars.

Source: 2011 Global Pricing Strategy. Simon-Kucher & Partners, IE Business School, Alimarket

Pric

e w

ars

Focus on sales volume

Many

HighFew

Low


How to avoid price wars

Some industries run an inherently higher risk than others. Economic

theory and our own empirical evidence indicate that when there is a

large concentration of big customers in a market, there is greater pres-

sure on competitors.

Seven steps have been identified to help avoid a price war:

a. Avoid strategies that force competitors to respond with lower prices.

Reactions by competitors, coupled with a lack of knowledge or mis-

judgments, encourage other companies to react incorrectly or over-

react. If you want to gain share, do so gradually.

b. Avoid all possible misreads. Interpreting market movements is essen-

tial. Invest in understanding the competitors’ prices to avoid reacting

before understanding the reason behind the price cuts and whether

the cuts are proportionate to the consumer’s demand based on price

/ value.

c. Avoid over-reaction as a general rule of thumb. One reason price wars

are more prevalent now than in the past is that managers view a price

reduction as quick and quickly reversible, when the truth is otherwise.

d. Play your value map right. This is another key aspect that is not usually

studied correctly. By studying the sensitivity of customers and compe-

titors’ cost structure, the best price can be established. The best price

is the highest price the market is willing to bear.

e. Communicate your price effectively. This is another key issue, as men-

tioned previously, to prevent misreads. If we have to cut prices, it is

crucial to communicate all the reasons behind it to avoid misinter-

pretations that result in price wars.

f. Jawbone on pricing. In line with the communication mentioned pre-

viously, it is important to influence and explain fully the importance

and implications of pricing. It helps to speak openly about the horrors

of price competition.

g. Exploit market niches. While this seems obvious, greater efforts need

to be concentrated on exploiting market niches before opting to focus

on price as the sole driver of an increase in sales volume.

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3. Multichannel pricing managementThe website of computer manufacturer Dells asks prospective buyers to declare whether they are a home user,

small business, large business or government entity. Two years ago, the price of a 512 MB memory module (part

number A0193405) depended on which business segment one declared. At the time, Dell quoted $289.99 for a

large business, $266.21 for a government agency, $275.49 for a home, and $246.49 for a small business.

What explains these price differences? How does Dell benefit from it? Different segments have different

willingness to pay. Dell optimizes its prices, offering lowering prices to relatively price-sensitive segments. An

interesting aspect of Dell’s attempt to charge different prices to different customers is that the customers aid

Dell in its effort. According to a Dell spokesperson, each segment independently sets prices and the customer

is free to buy from whichever is cheapest.

This example illustrates that the value is in the mind of the person who values it and different minds value a

product differently. To capture this opportunity, companies will discriminate market prices. Price discrimination

is a strategy of charging different prices to different customer segments for the same or similar products. In

any market, different customers value products differently and, therefore, are willing to pay different amounts

for the product.

The automobile industry has capitalized on these differences in a very effective manner. Each manufacturer

offers a wide variety of models to cater to the preferences of different buyers: from subcompacts to compacts,

full-size sedans, SUVs, and sporty cars. Within each category, they also provide numerous options to make the

offerings more suited to multiple buyers, who may then pick and choose the options they desire.

Similaly, many consumers pay higher prices for electronics items, knowing very well that they will come down

significantly over time. And, stores like Gap and Old Navy routinely mark down merchandise after a relatively

short time following the introduction of new items; once again, however, many consumers do not hesitate to

pay full price.

Economic and marketing literature have long recognized that price discrimination can be a profitable pricing

strategy. In a market where preferences are mixed and products are viewed differently, companies can boost

profits by segmenting consumers and setting different prices, enabling them to extract more from consumers.

Empirical research indicates that profit can be as much as 34% higher when companies use price discrimination

than when they employ a uniform pricing strategy.


Figure 10: Does your company employ price discrimination? (Multiple choice)

We offer different brands at different prices

Prices vary depending on the channel

We offer individual and bundled products

We offer discounts to certain customer segments

Different prices are offered to customers depending on the geographic area

We do not engage in price discrimination

There are volume discounts

We offer different prices to customers depending on the date

10% 20% 30% 40% 50% 60%

In our survey of Consumer Goods & Retail companies, the outcome was that the majority used price discrimination

among brands. Many also offered bundles with different prices and discriminated prices based on the channel

and customer segment.

Among the various types of price differentiation, researchers and professionals have looked particularly at

self-selection given its numerous advantages, including low cost and easy application, not to mention its high

profitability. In price discrimination by self-selection, a company offers different versions of a product and different

prices and allows consumers to choose the one that best suits their preferences.

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The increasing popularity of internet has prompted many traditional retailers to become multi-channel retailers offering

consumers the choice between online and offline channels. More and more, Companies are using sales channels without

physical stores to increase or complement current processes for delivering products and services. As multi-channel retailing

gradually takes over, customers are faced with a wide range of purchasing and communication options. As a result, it is

becoming more commonplace for customers to use multiple channels to interact with the company.

A study by DoubleClick found that 65% of consumers were multi-channel consumers. Similar research by Forrester Research

indicated that more than two-thirds of consumers search for products online, but purchase offline.


Is it a good idea to offer multiple channels?

Consumers increasingly like to see products online

before setting foot in the store. Going first to internet,

they frequently choose what they want before going

to the store. However, once they are in the physical

store, they usually end up buying some other item.

After initial worries that the internet would steal

sales from stores, retailers now are realizing that

just the opposite is happening. Customers who

“window shop” online are much likelier to spend more

overall than those who just go to the store. A study

by Forrester Research recently found that customers

who shop three different ways –in stores, on Web

sites and with catalogs- spend about four times more

than customers who shop only through one of those

channels. Similarly, customers who shop two different

ways spend two to three times more than the single-

channel customer.

To take advantage of this behavior, major retailers

are looking for new ways to steer shoppers from one

channel to another. J.C. Penney, for instance, says it

posts weekly circulars online for customers to use in

the store. It also offers a broader selection of certain

items, like small appliances, in catalogs to encourage

people to shop multiple ways. Penney says the number

of customers using all three shopping mediums grew

30% last year, while the number using at least two

jumped 46%.

A recent study by consulting firm J.C. Williams Group

showed that J.C. Penney customers who shop just one

way spend, on average, $150 a year on its internet site,

$195 in its stores and $201 with the catalog. But Penney

customers who shop all three ways spent $887 a year.

“Any time a customer comes into the store because

of the catalog or Internet, there is a high incidence of

that customer buying something in the store,” says

John Irvin, a Penney executive vice president. “This is

the fastest growing change in customer behavior.”

The relationship between the use of the channel and

profitability is not restricted to the retail sector. A study

led by IE Business School on the European financial

sector produced several interesting conclusions. The

results showed that multi-channel customers are far

more profitable than single-channel customers. The

research also showed different levels of profitability

between customers using two channels and those

using three. The results suggest customers should

be encouraged to use two channels, but not three, to

interact with the company.

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Given the vast differences between online and offline channels, such as convenience, risk or transparency,

customer preferences are mixed regarding the channel, resulting in different perceptions of the channel

and price sensitivities. As a result, operating in multiple distribution channels provides an opportunity

to apply price discrimination based on channel, whereby the companies can set different prices for the

same product offered on the online and offline channel and customers can self-select their preferred

channel-price combination.

Next, we look at whether multi-channel retailers set different prices of the same product between online

and offline channels and determine the scale of the price differentials (gaps). We also analyze the factors

influencing a company’s decision to engage in channel-based price differentiation, their extent and

management (above all the influence of market, retailer and product factors).

Consumers use different retail channels in different ways and,

therefore, their perception of the channel varies. Studies show that a

buyers’ willingness to pay for a product through offline channels can

be 8% to 22% higher than through an online channel. Similarly, studies

suggest consumers have a different perception of price between online

and offline channels. Therefore, price differentiation based on the channel is

feasible. This, coupled with evidence that price discrimination boosts profits, should

spur companies to following a price discrimination strategy whenever they can.

However, industry professionals argue that in order to maintain a strong brand, the company offer

has to be consistent across channels. Varying prices may lead to customer confusion, anger, irritation

and a perception of price unfairness. Since previous research has shown that unfair price perceptions

decrease purchase intentions, practitioners advocate channel price integrity.

Channel-based price

differentiation

3.1


Empirical studies in the US produced similar results.

It appears that still only a minority of multi-channel

retailers engage in price discrimination based on

channel, the extent and management of which

vary from retailer to retailer, and product category

to product category. According to a study of over

a thousand products, different prices were set for

approximately 20% of the products. For products

with different prices, in around 70% of the cases

the offline price was higher. The highest positive

price gaps can be found in consumer electronics,

such as remote controls and memory devices.

The analysis shows that 29.63% of retailers engage

in price discrimination based on channel. Of these,

18.75% charged higher prices in the offline channel,

6.25% always charged higher prices in the online

channel, and the remaining 75% followed a mixed

strategy, charging higher prices in either the online

or offline channel depending on the product. In

summary, we found that retailers in fact engage

in price discrimination.

Figure 11: If there were a direct channel, would you vary prices between channels?

We haven’t studied it

We would use the same price

There would be a difference between 1%

and 10%

28%

52%

20%


This is shown in our study of the Spanish market. The vast majority of Spanish companies do not engage

in price discrimination by channel. Rather, they charge the same price in direct and indirect channels. Only

20% of Spanish companies set prices with a difference of up to 10% between channels.

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It is also interesting to understand the factors determining

the extent of channel-based price differentiation. Studies

show that the level of online competition has a significant

negative influence on the occurrence and extent of

channel-based price discrimination. The higher the online

competition, the lower the probability of a multi-channel

retailer engaging in channel-based price differentiation and

the size of the price gap between channels.

Further, the number of distribution channels that multi-channel retailers

operate has a negative influence on the extent of channel-based price differentiation, implying that

the higher the number of distribution channels, the lower the probability of price discrimination

given the complexity of coordinating the channels.

More interesting still is that results show that product type influences the extent of price

differentiation. The extent of channel-based price differentiation is highest in the case of

services, which are less vulnerable to cannibalization due to resale. Among products, we

also see a greater extent of channel-based price discrimination in the case of perishable

goods (food) than durables (appliances), lending further indication that retailers

are less involved in price discrimination for products that are suitable

for resale. These results could also explain the large group

of retailers that follow a mixed price discrimination

strategy adapted to the variety of products offered.

The results show that many multi-channel

retailers engage in channel-based price

differentiation and a certain increase in this

trend over time. Nevertheless, retailers still

apply consistent prices for the majority of

their products. Generally speaking, the 12-

16% price differential for products between the

online and offline channels reflects the differences

in consumers’ perception of the channel, although

this is relatively low compared to other types of price

discrimination. Overall, results show there is channel-based

price differentiation, but that the impact among retailers is still relatively limited.

When to differentiate prices

3.2

?


The number of

distribution channels that

multi-channel retailers

operate has a negative

influence on the extent of

the channel-based price

differentiation.

The higher the level of online

competition, the lower the

probability that a multi-channel

retailer will engage in channel-

based price differentiation.

The extent of

channel-based price

differentiation is highest

in the case of services,

which are less vulnerable

to cannibalization due to

resale.

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The analysis shows that not all companies

have the same motivation to engage in price

discrimination. The results of studies on the factors

behind the existence and extent of retail channel

price discrimination suggest that retailers act in

accordance with standard microeconomic theory:

for instance, higher levels of online competition

make retailers less motivated to engage in

channel-based price differentiation. At the same

time, the burden of coordinating effective multi-

channel price discrimination still hinders some

retailers from capturing the full opportunities

that price discrimination strategy can afford.

Although the level of price discrimination achieves

the expectations of the microeconomic standard

in some product categories (e.g., higher price

differentiation for services and perishable goods),

the differences in the nature of the products have

not been fully explored yet.

Going further, we see that multi-channel retailers

charge on average higher prices in the offline

channel. This practice is probably driven by the

higher perceived risk of the relatively new online

channel and/or the motivation of the company to

steer consumers to the less costly online channel.

Moreover, retailers may pursue different operating

targets for the online and offline channels and

use the offline channel to enhance their visibility.

However, there are always exceptions to the rule.

Online prices are normally higher than offline

prices in the food sector. There are basically two

reasons for this phenomenon: online food stores

offer a high degree of convenience, saving the

customer from having to make their weekly trip

to the supermarket and instead delivering the

products to their doorstep. We have also found

that online food shoppers are typically consumers

who have little time to shop and, therefore, are

more willing to pay a premium price for a delivery

service that saves them time. This example shows

that the customer’s price sensitivity is the main

trigger of channel-based price differentiation.


The results also show companies

not only use internet as an addi-

tional channel, but rather they

can explore this channel further,

engaging in channel-based price

differentiation. Nevertheless, since

a low online reach helps separate

markets and encourages channel-

based price differentiation, the

growing popularity of the internet

as a place to shop reduces the op-

portunities to use this channel for

price discrimination. In any event,

as online channels become more

popular, companies could reduce

their number of physical stores.

With a lower offline reach, they

can still engage in channel-based

price differentiation.

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Promising to match competitors’ online prices is becoming the trendiest shopping tactic for four big-

box chains, but retailing experts say the plans may backfire and send more shoppers scurrying to the

Internet. A few weeks ago, electronics giant BestBuy and discounter Target said that for the first time

they would match the prices offered by the online sites of some rivals, including Wal-Mart and Amazon.

The brick-and-mortar chains are trying to combat “showrooming” by shoppers who check out products in

stores but buy them on competitors’ websites, often at lower prices. Both retailers’ price-match policies

include significant caveats that could wind up confusing and angering customers, retail experts warned.

Not only do shoppers have to ask for price cuts, they also may have to prove the existence of a lower

price to harried store workers.

The stores say they are confident the new efforts will pay off. Best Buy said it has done at least one pilot

of its price-matching program in a major market and was pleased with the results. Best Buy will match

prices on electronics and appliances –but not other products- from 20 different online rivals. It excluded

third-party sellers like those on Amazon, where prices are the most volatile. Best Buy said its staff must

verify on a store computer that the rival’s price is actually lower at that moment and that the product

is readily available. And a salesperson or manager can refuse to match a price if they deem it too low.

The key to resisting

Price matching

3.3


Another risk that retailers run is encouraging even more

shoppers to check the internet to compare prices, a

comparison that doesn’t favor the big box stores. A recent

survey by William Blair found that on average Target’s

prices were about 14% higher than Amazon’s, Best Buy’s

were 16% higher and Wal-Mart’s prices were 9% higher.

The comparison included shipping costs for Amazon, but

not sales taxes. And a salesperson or manager can refuse

to match a price if they deem it too low.

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If manufacturers begin engaging directly with consumers, most

likely they will rely less on intermediaries for information on

consumers and potential customers. They could even start doing what

intermediaries did before, thereby introducing new price trends in the system. These changes

would shape the dependence structure of their relationships with the channel. Similarly, the

dependence relationships will not depend again on a single intermediary to act as a channel.

Companies with indirect channels that implement multi-channel marketing will need to minimize

the potential for the channel’s dysfunctional conflict. Any direct sales by the company to the end

customer can be perceived as an attempt to circumvent the intermediaries. However, from the

business standpoint, direct contact with customers can help them identify potential customers

and leverage up-selling and cross-selling opportunities.

Companies like HP, which have a large number of distributors marketing their products and

services, are faced with this situation. Although HP has taken a number of actions to mitigate

the potential conflicts with the channel –e.g., the prices on its website are higher than those

offered by its intermediaries- a conflict with the channel can arise, resulting in decreased sales

support by the distributors. The question is still how to strike a balance between reaching the

end customer and not offending partners in the channel.

Open-ended questions

3.4

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Has spent his career in the areas of commercial and

customer strategy in several sectors, including Consumer

Goods & Retail, where he was a pioneer in the use of

real time models for smart customers. Has recently

focused strategy development in Social Media & Digital

Transformation.

He began working at The Boston Consulting Group before

joining BNP Paribas group as Marketing Manager. He is

Associate professor at Universidad Carlos III in Madrid and

ESIC and writer of articles for specialist journals.

Has a bachelor’s degree in statistical sciences and techniques from Universidad Carlos III of

Madrid and an MBA from London School of Economics

Pablo González Muñoz Partner Ernst & Young - Advisory Services


4. Ernst & Young viewpointThe needs and expectations of customers and consumers in Spain are set to change dramatically for a number of reasons: 1)

the country’s economic outlook, with flagging activity and rampant unemployment, new social trends shaped by stagnant

disposable income and more time dedicated to work –which naturally implies an increase in online time-; 2) demographic

changes, whereby purchase decisions will be made by people from the 1970s and 1980s generation -with more individual

profiles and greater demands for personalization-; 3) continuous proliferation of new digital technologies, resulting in new

capacities to share information and compare the value of products; and 4) an exponential loss of “confidence” in mass

advertising.

These new needs and expectations will lead consumers to demand individually tailored products and services that offer

“greater guarantees of trust” in the products and services they purchase and to reject surprises.

Companies will need to personalize price management by geographic environment and customer type and set prices based

on product category, the impact of loyalty programs and the role of promotion through different channels. All of this must

come alongside easier and more transparent communication and promotional mechanics for the customer, with simplicity

becoming a key future driver.

This heralds a new era shaped by the personalization-simplicity puzzle, prompting companies to:

• Continue advancing on the development of price segmentation skills based on geographic area, competition, product type,

customer type, and channel mix.

• Anticipate the impact of price strategies and tactics by developing engines that simulate their impact on the income

statement.

• Exert greater analytical control in implementing the stated policies to prevent distortions in execution.

• Optimize the value chain to prevent operational inefficiencies from being transmitted to the customer via price.

All of this is dealt with in this study, which is geared towards practices on which some sector players sector and customers

we have been working are already working.

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The IE Foundation is an instrument of IE that enables students, teachers and staff to further their educational, research and management activities.

Priority is given to the training and cultural outreach of all people and institutions that have ties with IE.

Resources go to funding scholarships for students, grants for training and research for professors, and funds for updating and improving IE’s educational structure.

The Foundation operates throughout Spain, but also has an international presence throughout North and South America, Southeast Asia, the Middle East, Northern Africa and Europe.

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