Beware the Risks of Premium Pricing

February 19, 2013

I recently had an interesting experience gathering quotes from a bunch of roofing contractors to replace the aging shingles on my home.  First, I was amazed at the lack of consistency among the estimates I received.  Some were fairly low, several were grouped closely in the middle, and a few were extremely high.  One contractor in particular really captured my interest when his quote was more than double compared to all of the other estimates I had received.  I was aware that this particular contractor had a well known reputation for being expensive.  However, I was still shocked when I received his price quote.  The contractor made no apologies about being the most expensive roofing company in the area – in fact, he was somewhat boastful about it.  Of course, I got the requisite speech about how the company uses only the “highest quality materials” and delivers “superior service and craftmanship.”  I would have considered giving him the job had his price been only somewhat more than the others; but, I was hard pressed to justify a price that was more than double everyone else.  So, in the end I went with another roofing contractor who did a terrific job, with similar materials at a much lower cost.

Interestingly, the expensive contractor was upset when his company did not get the job; and during our discussion he shared how his business has been struggling because more and more people are balking at his premium prices.  With his high operating costs (that fleet of shiny custom painted trucks are nice but expensive), it became clear that his business might be in a bind.  I started to wonder if the contractor is truly willing to make the strategic decisions necessary to keep the business viable.  Time will tell.  This experience got me thinking about pricing strategies; and in particular, how challenging it can be to maintain a premium pricing strategy.

A premium pricing strategy is the practice of setting a price for a product or service much higher than the prevailing average market price, with the expectation that customers will purchase it with an assumption that it must have unusually high quality or reputation.  Interestingly, in some cases, the product quality may not actually be better, but the seller has invested heavily in the marketing needed to give the impression of high quality.

Premium pricing works best in the following circumstances:

  • There is a perception among consumers that the product or service is a “luxury” product, or has unusually high quality.
  • There are strong barriers to entry. These barriers might include such factors as a large marketing expenditure to gain notice among consumers and/or significant start-up and operational costs.
  • The seller can easily restrict the amount of product sold, thereby giving its products an aura of exclusivity.
  • There are no easily attained substitutes for the product or service.
  • The product is protected by a patent, and the company is aggressively maintaining its rights under that patent.

Advantages of Premium Pricing

The following are advantages of using the premium pricing method:

  • Entry barrier. If a company invests heavily in its premium brands, it can be extremely difficult for a competitor to offer a competing product at the same price point without also investing a large amount in marketing.
  • High profit margin. There can be an unusually high gross margin associated with premium pricing. However, a company engaging in this strategy must consistently attain sufficient volume to offset the hefty marketing costs associated with it.

Challenges of Maintaining a Premium Pricing Strategy

Maintaining a premium pricing strategy is not easy.  There are several challenges a company will likely face when employing a premium pricing strategy; such as:

  • Branding cost. The costs required to establish and maintain a premium pricing strategy can be large, and must be maintained for as long as this pricing strategy is followed. Otherwise, the premium brand recognition by consumers will likely falter, and the company will have difficulty maintaining its price points.
  • Competition. There will be a continual stream of competitors challenging the top tier pricing category with lower-priced offerings. This can cause a problem, because it increases the perception in the minds of consumers that the entire product category is worth less than it used to be.  Also, without a clear measurable differentiation in both quality and service, consumers are likely to give their business to a lower cost competitor (this is especially true during slow or declining economic conditions when consumers become increasingly cost conscious).
  • Sales volume. If a company chooses to follow a premium pricing strategy, it will have to confine its selling efforts to the top tier of the market, which limits its overall sales volume. This makes it difficult for a company to pursue aggressive sales growth and premium pricing at the same time. The strategy can be followed as long as the company is expanding into new geographic regions, since it is still pursuing the top tier in these new markets.
  • High unit costs. Because the company using this strategy is restricting itself to low sales volume, it can never generate the cost reductions that a high-volume producer would be able to achieve.

A premium pricing strategy can work great for a company when many of the challenges listed above don’t exist or are minimal.  However, it is critical for a company to anticipate potential business environment and/or competitive scenarios, and then plan for the adjustments that would be necessary to survive if their premium pricing strategy starts to falter – – becoming less of an asset and more of a burden to the organization.


How often are you reviewing your business plan?

November 9, 2012

Strategic plans can quickly become ignored, forgotten and useless without some process in place to keep it alive.  Countless studies and surveys confirm that strategy execution remains a top priority for CEO’s and senior executive teams.  Yet, I’m amazed to hear how infrequently executive teams review the progress of their plans.  Regularly reviewing the progress of strategic initiatives helps maintain the level of accountability necessary to get things done and achieve the plan’s objectives.

If we agree that business plans should be reviewed regularly, then the next logical question is how often?  Well, unfortunately the answer is “it depends.”  Industry dynamics, competitive pressures, economic conditions, and financial performance can all influence the timing and frequency for reviewing a business plan.  In addition, where a company is in its life cycle may also dictate how often business plans need to be reviewed – a start-up would likely have a different cadence compared to a well-established organization.

Recently, there has been some press coverage regarding leadership changes at Ford Motor Company.  What caught my eye in a few of these articles was a reference to how Ford’s current CEO, Alan Mulally, several years ago instituted weekly business plan reviews.  Yes, weekly.  It is interesting to see that those weekly meetings focus on simply reviewing and reporting progress to date and next steps.  I’m intrigued that the meetings do not allow for any long-winded explanations or excuses about why targets were not met or why an initiative is behind schedule.  Division leaders are expected to objectively report results, good or bad, and then share what needs to be done moving forward.  The automotive industry is still trying to bounce back from a brutal economic downturn, creating an intense focus on getting results fast.  I imagine that Mulally truly believes in his plan and that he is convinced the long-term viability of Ford depends on successfully executing that plan.  A weekly business plan review, as burdensome as it may seem, certainly reinforces accountability and eliminates the ability to hide and ignore the plan.

Clearly not every company needs to adopt a weekly business plan review.  The key takeaway is less about how often a business plan should be reviewed, and more about the simple fact that a plan should be reviewed regularly.  Review the plan; ask for updates on progress; hold people accountable – – you’ll be amazed with the results.


Want a Winning Strategy? Dare to be Different

June 11, 2012

It can be challenging to sell products and services in competitive markets where customers can shop around and find like products at similar prices.  Customers are much more likely to consider switching when there isn’t much differentiation between quality, price, features, convenience and service.  The good news is that most companies typically have a group of core customers who are fiercely loyal and are unlikely to suddenly jump to a competitor.  The bad news is that customer loyalty can fade over time for a variety of reasons.  As a result, some companies may see sales growth stall as customer churn increases; becoming an exhausting zero-sum game of winning new customers while losing others out the back door.

When working with companies facing this situation, I like to ask a very important strategic question:  Do you know why your customers really choose to purchase your company’s products or services?  To create a sustainable competitive advantage it is critical to have something you can point to that not only differentiates your products and services from your competition, but is also not easy for your competitors to replicate.  A successful competitive strategy is about being or offering something different, which in turn is truly valued by both existing and potential customers.

A few years back I asked a group of executives at one company if they knew why customers purchased their products.  I was surprised to get a different answer from each person; in fact, one high-level executive admitted (privately) that he simply had no idea why customers were choosing their products – especially since they didn’t have the lowest prices in the market, nor were their products and service that much different or better from what was being offered by their competitors.  Clearly the company either did not have a well-defined value proposition; or their value proposition wasn’t universally known.  How can a company ever expect to achieve even modest sales growth without some kind of value proposition?

To create a winning strategy, you must establish and clearly communicate what truly distinguishes your products from the products offered by your competitors.  I would even take it one step further by also distinguishing your existing products and services from what you’ve done in the past.  In today’s competitive business environment, it is no longer effective to be pretty good at everything.  To help pinpoint where your company delivers value, take a step back and finish the following statement:  “We are the most…..”   But, don’t stop there; create a compelling and unique value proposition by daring to be different and make it happen.


Sony’s New Strategy: A Plan With All the Right Elements

April 30, 2012

Sony’s new CEO, Kazuo Hirai, recently unveiled the company’s new multi-year strategic plan, which will hopefully set a course for reversing years of consistently sub-par business performance.  Not surprisingly, a fair amount of editorials have already emerged evaluating the content of the plan and attempting to predict whether or not it will work.  Putting aside for a moment any predictions of success or failure; what is worth noting is that Sony’s new strategy includes the core elements that are typically found in good actionable strategic plans.

While a well constructed strategic plan is certainly not a guarantee of success; a poorly structured plan will likely increase the risk of failure.  Strategic planning is not a perfect science.  The basic objective of a strategic plan is to chart a course that will place the organization in the best possible position for success.  A good strategic plan:

  • carries the voice of the CEO
  • sets organizational priorities
  • provides clarity of direction for the organization
  • calls the organization to action or conveys urgency
  • defines what success looks like and how it will be measured
  • stretches and challenges the organization
  • balances short and long-term needs
  • provides a basis for more detailed planning
  • is understandable and executable.

Looking at Sony’s new strategic plan, it is easy to spot all of these core elements.  The CEO personally delivered the details of the plan publicly; which allowed him to emphasize key messages and establish ownership of the plan.  He conveyed a sense of urgency to the organization and repeatedly referenced the need for fundamental change moving forward.  The details he shared were stated clearly and concisely – leaving little room for fuzzy interpretation or manipulation.  The strategic plan directly identifies the organization’s priorities:  mobile devices, video games, and digital cameras.  At the same time, the plan reflects a willingness to make difficult choices by stating that LCD televisions will no longer be a core business for the company.  The CEO defines success over the next three years with specific measurable goals for revenue and operating profit margin.  Some direction is provided for achieving those goals by signalling a focus on expanding sales in emerging markets, as well as pursuing new business opportunities within healthcare and life sciences.  Lastly, while Sony recognizes the importance of positioning the company to achieve future success, the CEO did not shy away from stating the near-term need for significant expense and staff reductions within specific business units.

Much remains to be seen to determine if Sony’s new strategy will succeed.  Creating the plan, while a significant milestone, really just triggers the start of more detailed planning and overall execution of key initiatives.  Even with good execution, the outcomes of the company’s strategic choices will need to be carefully monitored.  With the right amount of strategic agility and organizational flexibility, Sony may be able to emerge once again as a strong industry player.  The clock is now ticking; they have a plan; now we just need to see the results.


Anticipating an Uncertain Future

April 4, 2012

In my last post I discussed how strategic agility is necessary to quickly assess and respond to threats or opportunities that suddenly emerge with little warning.  Managing in that kind of dynamic environment can lead some executives to believe that trying to anticipate the future and creating a multi-year strategic plan is a waste of their time.  Who needs to plan that far in advance when the organization has developed an amazing ‘reactionary response reflex’ competency?  Perhaps this is what they mean by ‘just-in-time’ management.

Longer-range planning is typically based on specific assumptions and beliefs about the future, which in turn helps identify what needs to be considered and started now.  While the future can be difficult to predict with precision, strategy development must nevertheless take that uncertainty into account.  To offset the risks of this uncertainty, it is necessary to incorporate some degree of flexibility into your strategies.

Strategic uncertainty increases the further-out you look.  It is relatively easy to predict what will be happening with your business in the near-term.  In all likelihood, your major markets and competitors will look and act the same tomorrow, or next week, or even within a month or two.  In the short-term there are very few (probably only one) potential scenarios to consider.  As much as we may think that major industry-changing challenges will surely emerge daily; the reality is that there is only a slim chance something that drastic will unexpectedly explode on the scene.

However, once you start looking three or more years out, the number of plausible scenarios increase.  That said, even though you may think there are an infinite number of possible futures, it is far more likely that there are boundaries to what is truly possible or even plausible.  Flexibility requires that you identify the appropriate strategic responses or options for each of those potential future scenarios.  Having multiple strategic options will allow you to quickly execute what is needed as your market or industry evolves.

When looking at those strategic options, it is likely you will find that each strategy can be decomposed into a set of basic elements (such as:  technology solutions, certain system enhancements, new market channels, new products or operational capabilities, enhanced pricing models, etc.).  Elements that are common across most strategic options should be pursued without reservation due to the relative small strategic risk.  In other words, you would be working on the right things no matter what scenarios emerge down the road.

As your business environment evolves and various events occur, the probabilities of certain scenarios might need to be updated.  In addition, some of those previously defined strategic options might need to be exercised, while others are preserved or abandoned.  As time moves on, there may be new future scenarios to consider.  Thus making the case for a continuous and flexible planning process.  While your executive team might be conditioned and fairly effective at rapid responses to unexpected threats or opportunities; the goal should be to more proactively anticipate and prepare for the future.


3 Pillars of Strategic Agility

March 16, 2012

Many companies operate in industries where threats and opportunities can appear quickly, with little advance warning, often creating vexing strategic choices.  With a steady stream of unpredictable and complex business challenges, it is not surprising that there is minimal enthusiasm for a traditional, plodding, highly structured annual strategic planning process.  To survive and thrive in these highly dynamic business environments, a company’s ‘strategic agility’ becomes a critical competency.

Most companies don’t fail because they do the wrong things.  Failure, or just plain lackluster performance, is usually the result of doing what used to be the right things for far too long.  Having strategic agility is not just about being quick, responsive or nimble.  It is also about having a heightened level of strategic alertness.  To be strategically agile, a company must have the ability and capacity to synthesize and assess various pieces of information from multiple sources to identify what is truly relevant.  However, in a rapidly changing and highly competitive environment, the timeliness of assembling and addressing relevant intelligence is also essential.

There are three main pillars to strategic agility:

  1. Strategic Insight – the ability to see and frame opportunities and threats in a timely manner.  Beyond having the resources available to capture and analyze relevant information, it is equally important that key decision makers who are readily accessible and willing to take the time to address these situations appropriately.
  2. Resource Flexibility – a fast and efficient means to mobilize and/or redeploy resources within an organization.   Identifying what needs to be done is simply not enough if you cannot get or allocate the necessary resources to get it done .  Unfortunately, many organizational and cultural constraints may exist  that hinder resource flexibility.  Even a small amount of resource flexibility will enhance a company’s strategic agility.
  3. Leadership Unity – the collective commitment and shared values of the key decision makers within the organization.  Agility requires high-quality constructive internal dialogue, a willingness and ability to make decisions and take informed risks in a timely manner (often without complete information).  Moreover, this needs to be done consistently without getting caught-up in a ‘win/lose’ political game among senior leaders.

Success in today’s business environment requires an ability to continuously adjust and adapt strategic direction.  Longer-range planning still has a place in setting the stage to position a company for success down the road; it just needs to be properly balanced with the strategic agility necessary to address rapidly emerging opportunities or threats in a timely fashion.


Avoid Backing Into Your Strategy

February 23, 2012

Here is the scenario:  your company launches a strategic planning process; and initially everything seems to be moving along nicely in the right direction.  Your confidence builds as you manage to achieve consensus on the three or four strategic ‘areas of focus’ for the company.  You then work productively with the senior executive team to establish strategic objectives and measurable goals.  Next, you move on to identifying how the company will achieve those goals; but then something odd occurs….no new initiatives are identified; nobody suggests stopping any projects, and the portfolio of “strategic” initiatives that emerges is simply a list of all the existing big projects across the company.  You start wondering:  “Is it me, or did we just back into creating a ‘strategy’ that simply provides a nicely worded rationale for all of our existing initiatives?”

Where are the strategic choices?  What are the new things that need to be pursued?  What existing projects need to be delayed or stopped?  How did this happen?  Why did this happen?

You might think that this scenario is far-fetched; but sadly it may be more common than you realize.  I myself ran into this situation at one particular company.  Unfortunately, it became apparent that the senior executive team was never fully engaged in or supportive of the strategic planning process.  We discovered over time that much of this apathy was rooted in their deep dislike of the company’s CEO.  So, instead of seeing the benefits of collectively creating a good strategy for the company, they viewed this emerging plan as “his” strategy – not the company’s, and certainly not their strategy.  Initially, they politely established what they considered the harmless higher-level content of the strategic plan; but, it quickly became clear that they had no intention of making any real strategic choices.  The goal for them was to ensure that the organization simply ‘stay the course’ with their existing collection of initiatives. 

In the end, I had one senior executive share with me that the prevailing feeling among his peers was to not put much energy into creating a ‘corporate strategy’ and to ensure that they maintained the status quo – ultimately making the strategic plan irrelevant.  Insidious behavior?  Absolutely.  Frustrating for a strategic planner?  Most definitely.  While this example illustrates how a dysfunctional culture at the top of an organization can hinder strategy development, another key takeaway is that writing a strategy which conveniently fits everything you’re already doing reflects an unwillingness or inability to make real strategic choices.  Without choices and trade-offs there is no coherent strategy.   

It should be noted that for a classic top-down/bottom-up planning process, it is expected that some existing corporate initiatives would end up in the strategic plan.  However, to truly achieve your strategic goals, a company needs to objectively assess the anticipated impact and timing of projects (planned and underway) to identify gaps that need to be filled with something new or to stop something that will not get you where you need to go. 

The company’s strategic direction, and strategic goals need to drive the selection of initiatives.  It is too risky to assume that an existing collection of random initiatives will somehow produce the results necessary to sustain positive business performance.  Faced with constant constraints on funding and the limited availability of resources to get things done, how willing is your company to take that risk?


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