Choosing When Not To Version Your Product

Until now I have been extolling  the virtues of versioining – finding the needs of different segments and targeting them with versions at prices they are willing to pay. I have written about

Eclipsing all these  topics is the overarching topic of when not to version, even when all (marketing) factors are in its favor.

Despite its advantages versioning should be avoided when presence of versions will dilute a business’ unique competitive advantage and its brand message. Versioning has to align with the vision and strategy and not just meet the short-term profitability goals.

Here is an illustration that comes from the 2008 book, Cadbury’s Purple Reign by John Bradley. At a pivotal moment in its business history, Cadbury’s choose to kill all six of its inferior versions even though they were generating considerable revenue and all it had to replace them was Cocoa Essence that hardly registered its presence in the market.

There was a market for these “adulterated versions” that were priced attractively (because most of the ingredients are fillers). The versions had been in place for valid reasons and were targeted at right customer segments. All  other players in the market were doing it. Cadbury’s was making profitable revenue from these product lines and shutting these down would hand-over their market share to their competitors.

On the other hand, Cocoa Essence had to be priced much higher than adulterated versions (because of the large percentage of pure cocoa in it) and at that time there were not many customers who were willing to pay high prices for Cocoa, pure or not.

John Bradley writes,

They did not have to do it; it was not against the law to add wholesome foodstuffs to raw cocoa, as long as they were declared on the label.

Cadbury could easily have kept advertising Cocoa Essence as ‘Absolutely Pure, therefore Best’ while still promoting the cheaper cocoas to the lower end of the market.

Yet, Cadbury’s chose to go with just the Cocoa Essence, shutting down other versions, because:

[Continuing to support the previous versions] would have missed out on the huge benefit that was to come from the move: the building of the Cadbury brand reputation and that it would define how consumers should view the cocoa category

By giving up on adulterated Cocoa versions Cadbury’s stood to claim the sole ownership of the Cocoa category with a strong message that could not be easily assailed by the competition. The conversation shifted from, “we have the purest cocoa and also the not so pure versions”,  to, “we have only the purest cocoa – Absolutely pure, therefore best!”

That’s competitive advantage from deliberate versioning. Every version you add must fit with your overarching brand message and competitive strengths. Conversely, versions that weaken your brand message must be pruned even if they are profitable.

A contemporary example is versioning SaaS offerings based on availability and security. It is true that not all customers  want financial grade availability and security and not all want to pay the price premium for the highest grade security. Yet, does it make sense for your  business to provide two versions, a super-security version at premium price and a lower priced version with lower grade security and availability characteristics?

Versioning has to be a strategic decision  and strategy is about making tough choices. Versioning should align with your vision and long term goals,  not just short term profitability.

What is your versioning strategy?

Lindt’s Bitter Profit Drop

Lindt reported almost 90% drop in its profit, while cost overruns was a contributor the main reason quoted by The Wall Street Journal is the failure to increase prices.

Swiss chocolate maker Chocoladefabriken Lindt & Spruengli AG has suffered from a failure to raise prices late last year to offset higher cocoa prices, underperforming rivals with an 88% drop in first-half net profit and lower overall sales.

The lead line from the WSJ article does not tell the full story. Lindt’s profit dropped from 22.9 million Swiss francs to 2.7 million Swiss francs.  There was a a one time charge 22.2 million Swiss francs in that expenses. Their operating profit, excluding these charges and taxes, is a better measure but still it includes factors unrelated to marginal costs, like currency fluctuations and depreciation.  So let us look at their gross margin numbers and compare the number for this six months against the same period last year (note we cannot simply use the previous six month period because of seasonality variations).

Compared to previous year same six months  their gross margin was 64% from sales of 1.03 billion Swiss francs  and this six months gross margin is  62% from sales of 0.985 billion Swiss francs. Their cost of revenue is almost identical to YoY numbers while their sales  fell 4.3% from its year over year numbers. This does support the theory that failure to pass on cost increases to customers as price increases resulted in loss.

To retain the same gross margin as YoY number, Lindt should have raised its prices by 8%, assuming its sales will not fall any farther than the 4.3% drop. They were concerned whether the sales would have dropped steeply if they had increased prices, a valid concern that can only be answered by looking at their market data on customer preference and price elasticity of demand at different price points. Their sales had to drop additional 7% (email me for the math) to make the price increase unattractive.

While costs are irrelevant to pricing (especially at 64% margin and for the premium product) the commodity price increase of last year should have been used as a pretext to increase prices. Customers are more willing to accept price increases when there is a reason (however trivial or irrelevant) than unexplained increases.  There are also other methods that would have increased margin without a direct price increase, one of which is using creative packaging that reduces amount sold for the same price saving marginal cost. Cadbury explicitly stated this in their annual report, and Nestle’s size reduction of Haagen Dazs was popularized by none other than Ben and Jerry’s (Unilever).

The net is, Lindt should have taken steps for better price realization (price increase , reduction in promotions and creative packaging) using the commodity price increase as a pretext.