Silly CEO, Pricing is for Customers

By Kevin Meyer

Probably the biggest hurdle for ops guys when they transition into general management roles is learning about sales, marketing, and especially pricing.  At first glance it doesn't appear to be scientific and it is filled with extraneous inputs – like emotion.  Yuck.

I know as a young engineer I used to roll my eyes at my friends in sales who traveled around to great places, entertained constantly, and were rewarded with lavish meetings in Hawaii.  Actually "roll my eyes" was being polite.  How hard of a job is that?  One of my roommates back then was a marketing guy fresh out of MBA school whose job it was to scout out the location for the next annual sales meeting for our 500 sales reps.  He spent the entire year traveling around being wined and dined and drooled over by the best resorts in Hawaii, Mexico, and the Carribbean.  Yes, that's supposedly a "job."

A decade later I started my own contract manufacturing company with a great operations infrastructure designed from the ground up with lean in mind.  Incredibly simplified processes, people-oriented, agile beyond all get out.  We could do anything, cheaper, faster, better.  And we sat and waited for the sales.  And waited, and waited.  I guess "build it and they will come" isn't exactly a sales and marketing strategy.  So my partners and I went out and began banging on the doors of potential customers.  And banged and banged.  Long story short, it took a long time before we learned the hard way about the science of marketing and the effort in sales.  And, looking back on my early career, I decided those sales guys can have their expense accounts and lavish tropical meetings – the work really was hard.

Between that experience and running my current medical device company I learned a lot, and especially learned how lean can factor into various functions.  And one thing I learned was that price is a reflection of value, and value is determined by the customer.  As much as we'd like to price products at "cost plus" it will simply fall prey to market dynamics, which are driven by customer perceptions of value.

Apparently I, as well as pretty much every other lean leader, knows more than Proctor and Gamble CEO Robert McDonald understands.  Yes, that preeminent marketing powerhouse of P&G no less.  See he somehow thinks he can control prices in a competitive market.  Really.  In an investor conference call discussing P&G results, where did he place the blame for his company's poor relative performance?

P&G blamed weak developed markets and competitors' failure to follow its lead on price hikes.

Seriously.  He expected to be able to raise prices and have his competitors simply follow suit.  What happened?  His competitors didn't raise prices, and they ate P&G's lunch.

P&G's sales rose 3%, which looked skimpy against an 8.5% rise for rival Unilever PLC and a 6.5% increase for Colgate-Palmolive Co.

Of course the analysts were none too happy, and if you've ever sat in on an investor conference call you'll know that serious analyst critique is a rarity on such calls.  Not this time.

"Good quarter, guys" wasn't the message Procter & Gamble Co. Chief Executive Robert McDonald got when he dialed in to his company's earnings conference call Friday. Instead, he confronted an unusually angry barrage from Wall Street analysts over the latest in a string of weak results from the world's largest consumer products company. The analysts showed little restraint in venting their frustration after P&G lowered its profit outlook and said it would roll back recent attempts to raise prices in key markets.

Sure those analysts usually have a ridiculous short-term perspective, but in this case they were properly venting about a lack of basic competence.

But there's more! And like a set of ginsu knives, it gets worse.  Apparently Robert McDonald's P&G doesn't understand how pricing is both a reflection of customer value – but also influences the perception of value by the customer.

The consumer products giant cut prices aggressively in recent years in a world-wide battle for market share. More recently, it has tried to roll back some of those cuts as input prices have risen. Those moves cut into P&G's market share, which fell in 55% of the categories and countries where it competes.

Most of us have learned that the hard way.  Apparently it has taken Mr. McDonald just a little longer than the rest of us.

Prices are a reflection of value from the perspective of the customer.  But if you cut prices beneath that value point, it also changes the perception of value.  Two related things happen: the actual perceived value of your product goes down and/or the price associated with that value gets adjusted.  Either way you lose.  It becomes virtually impossible to later raise prices in the face of that changed perception of value. 

Companies fall into that trap all the time when they chase market share and the siren song of increased cash through volume instead of simply focusing on delivering increased value.  Just ask GM.  Winemakers have known that for generations – a lower price leads to a lowered perception of value which leads to a lower price.

A huge company built on marketing is learning a lesson on value.  A lesson many of us learned long ago.