Effective Price Management

Lowering Prices To Generate Sales?

Here is another CEO who clearly believes lowering prices does not automatically guarantee  sales increase: Macy’s Terry J. Lundgren.  In his inteview with The Wall Street Journal, Mr. Lundgren  said,

WSJ: Do you think about lowering your average selling price or changing your product blend, as some of your competitors have done?

Mr. Lundgren: Here’s the challenge. We have [a men’s pants brand], and they typically go out the door between $29.50 and $32.50, with all the coupons and everything.

What Mr.Lundgren refers to as “out the door price” is the “pocket price“, the net price after all discounts. The net effect of the discounts and coupons is price leakage that erodes profit, clearly Mr. Lundgren is driving Macy’s to focus on its price waterfall.

Mr.Lundgren’s management serve as the best case study so for on the three components of effective price management:

Knowing the value add to segments:

Our purchasers are women. She’s spending the same amounts but just shopping with a great deal of discretion. Value is the word, even if it’s at regular price. The intrinsic value of what she’s buying is very important.

Incremental analysis: How much should sales rise to compensate for loss in profit from price cuts? (Lundgren is on the direction but he is comparing top-line while he should be doing incremental math on lost profit. There is also numbers error as pointed out by the commenter.)

So we were getting tremendous sell-through at low price points and no margins. And I am not making my pants sales for last year, because my average sale dropped by 30%. It’s really hard to make the math work. I have to have 30% more transactions on this product to break even.

Customer Margin: Understanding that loss leaders are effective only if they help generate incremental profit from customers who are attracted to the stores by low prices of loss leaders.

We and the manufacturer together agreed to mark them (pants) down to $21.99 or something like that. Selling like hotcakes. Every other pants around them stopped selling.

Does your business practice effective price management?

Best Buy Price Waterfall

Best Buy announced its fiscal Q1 earnings yesterday. The story is the opposite of what we saw for CPG earnings. The CPGs reported increase in profit despite losing market share but Best Buy reported decrease in profit despite an increase in market share. The main contributor to the drop in profits – price leakage. In its press release the company said

The company noted that comparable store sales in flat-panel televisions were essentially flat versus the prior year as unit increases offset declines in the average selling price.”

Despite selling more units the company brought is less revenue – the reason is the many discounts it made available to induce sales during the down economy. The price waterfall for flat panel TV tells the general story behind Best Buy’s statement regarding decline in selling price. From a list price of $1299 the pocket price, after all discounts and cost of capital to extend free credit to customers, drops by almost 40% to $781. bestbuy_price_waterfall

It is a good sign that the company realized the price leakage. We should expect to see drop in inventories, further drop in revenues but increase in profit  from better price realization in the coming months.