"LIST PRICE" IS OBSOLETE
Most goods are now sold in the US at below "Manufacturer's List Price." In an age of value shopping with multiple channels and reseller segmentation strategies, manufacturer's list price schemes (MLPs) can not be universally applicable and hence credible. Besides maintenance costs, MLPs have often created negative side-effects for both the manufacturer and the full-line, traditional channel partners.
The conditions that spawned MLPs have all changed. There are now good reasons for most manufacturers to go to net pricing and decentralize street pricing decisions to their channel partners. There are transitional problems with such a move, but the long term benefits are worth it for all channel partners.
CHANGE BEATS CENTRAL PLANNERS EVERYWHERE!
First the Soviet Empire collapsed because central planners couldn't keep up with complex, fast-changing global markets. In 1993, Proctor and Gamble (P&G) announced that they would cancel most promotions and move to every-day, lower net pricing. Microsoft stopped list pricing effective July 1, 1994. And then, on August 10, 1994, Alan Greenspan informed Congress that US Government economic data is too dated and too flawed to be of much use. He now relies more on the collective wisdom that is within global market rates.
These examples raise important questions. Are there any corporate price planners out there who can design one system that fairly serves all cost-of-business markets and all methods of segmenting and serving end-users? Can these planners keep up with the wisdom reflected in oscillating street prices? Do artificially high MLPs now cause unintended, negative side-effects? And, what happened to the original and now forgotten reasons for creating MLPs in the first place? Is there any lingering rationale for these schemes?
ORIGINS OF MLPs, 1941 - 1961
Most channel players have no idea when or why MLPs started. We just accept them as a given and proceed to work around them. Many MLPs started during WWII and the late 40's when everything was on allocation and government price controls affected all commodity materials. Manufacturers worried about re-sellers gouging the end-user, which would also reflect poorly on the manufacturer's brand name.
On balance, though, wholesale and retail America wanted MLPs. Small family operations were fearful of Sears, Roebuck and their ilk; so they lobbied for fair trade laws, MLPs, limited store hours, restrictive zoning, etc. The same recipe for restricting competition is still working in Japan, France and Germany. Their citizens pay more for lack of political muscle.
All channel partners preferred the illusion of control and profit predictability that MLPs seemed to insure. But, who was going to discount in an era of first chronic and then cyclical shortages? From 1946 to 1974, the economy kept growing faster than the supply to feed it.
Since 1975, however, a growing, global, glut-supply of equally excellent clone products has swamped a slow-growing, mature, post-consumer society demand in the US. The effectiveness of MLPs has declined inversely to this growing glut.
THE RISE OF CUSTOMER POWER
In the early 60's, customer power began a non-stop ascent. In 1961, a supreme court decision struck down fair price laws. Sensing new opportunity, two new discounters of brand-name products were founded in 1962 - K-Mart started opening stores in the cities and Wal-Mart in rural towns. Ralph Nadar kicked off the consumer advocacy trend in 1964 with his book "Unsafe at Any Speed" followed by a well publicized, personal lawsuit win against General Motors.
In 1974, Toys 'R Us became the first "category killer" to score big on Wall Street. This has inspired many more venture capital-backed, category killer and catalog successes. Many big-name brand manufacturers were initially reluctant to sell these "alternate, discounting channels", but then quality imports changed everything.
Starting in the mid-70's, Japanese quality manufacturing and reverse engineering methods combined to start a rising tide of equally excellent clones priced significantly under the original, branded products. When discounters stocked the clones and guaranteed total, unconditional satisfaction, brand switching increased and traditional brand premium margins started to decline.
If the number one domestic brand didn't sell the alternate channels, then the clones would. The clones circumvented traditional channels, gained credibility and then eventually sold traditional channels too. The high dollar period from 1983 to 1985 further accelerated this trend.
By the mid-80ís most manufacturers had lost control of the channels that they created. The final customer was now king as well as an educated, repeat value buyer. Today, they are becoming more loyal to the value vendor closest to them who, like Wal-Mart, guarantees complete satisfaction and everyday low prices (EDLP).
BAD SIDE-EFFECTS OF HIGH MLPs;
VICIOUS PRICE-CUTTING CYCLES
Although few of us are paying "list" for commodity items, manufacturers still go through their optimistic ritual of price increases which often don't stick. But, instead of rescinding the increases, they offer more promotional discounts and off-invoice subsidies. Promotions, like coffee, can initially provide a quick lift. Sales increase as the cherry-pickers and forward-buyers respond, but then the slump follows along with competitive retaliation. Forgetting who started the dealing, a vicious cycle fueled by mutual paranoia starts among competitors.
The more deals that channel resellers get, the more they suspect that there are even better ones that their larger competitors must be enjoying. Resellers become obsessed with shopping for quick-fix price deals instead of focusing on the long term objectives of partnering for win-win, total cost reductions or creating distinct service value for targeted customer niches.
Because re-sellers are obsessing on discounts, most can't meaningfully define who their number one niche of customers are or what their "unique marketing proposition" for those customers is aside from "service." If this "service" is unfocused and mediocre, and if all resellers are now selling equally excellent commodities, what else could customers shop for but price?
The vicious cycle of buying quick-fix promotional savings flows into the temptation of using these buying savings for quick-fix promotions to the next customer in the channel. Now, all channel customers are being trained to buy what is on sale today instead of buying the best total value brand or best total value-added service package. Both brand equity for manufacturers and service brand equity for re-sellers are eroding and discounted.
Because selling price is so easy, salespeople may forget how to sell both product and personal value. They often demand more deals to match and beat the ones that the competition is offering. Best salesreps see requests for a better price as an invitation to grow the customer's bottom line in some consultative, sustainable way. They then demand and get last look plus a premium for their personal value-added. If salesreps become price messengers and order takers, then customers will eventually by-pass them and their costs.
All of the tactical deals are often wrapped up in the biggest and most addictive promotions of all, the manufacturers' year-end load-up programs and annual growth rebates. Besides fueling price selling through the channel, these deals steal volume from next year to boost this year's earnings and bonuses. But, next year then starts with a slump requiring an even bigger year-end deal or else earnings and bonuses go down even more. Escalating drug dosages are needed to achieve the same year-end outcomes.
No wonder P & G announced in early 1993 that they were going cold turkey on promotions and restructuring to put all savings into lower, every-day, net prices and brand building. Without the year-end load-up, they had to take a write-off and they lost some market share as addicted price-buyers switched.
Four quarters later, however, their sales have started to grow faster than the industry. Their profit margin was the best in 21 years even though their everyday prices were substantially lower including a 12% year-to-year reduction on Pampers!
They are steadfastly targeting the growing, value buying segment of customers who want to buy best brands at EDLP without having to load up.
These consumers are apt to then transfer their new satisfied buying experiences to their commercial buying opportunities on the job. Buying best value on a steady, fast-flow basis is not a fad, it is a trend. Watch for other manufacturers to follow this bold and on-target strategy.
ANOTHER MAJOR SIDE-EFFECT; CROSS-SUBSIDIZED PRICING
A second major problem with MLPs are that they have built-in, cross-subsidized, turn-earn results for resellers. The full-service resellers historically stocked and sold entire lines at list price. They made perhaps 150% or more of their profits on the commodities to cover the loss incurred on slow to non-moving items with insufficient turn-earn power. The discounters arrived and sold only the commodities at "20% (+) off" for a great turn-earn considering they had no cross-subsidized losers to support.
The full-service resellers' should have responded with at least five tactics. 1) Discount the commodities enough to keep customers from going to discounters, because they still offered one-stop shopping for the remainder of their target customer's needs. 2) Weed out the dead "service items" that either have no clear logical niche to serve or that are redundant copies of the number 1 and 2 producers. 3) Partner with the best suppliers to double turns, improve fill-rates and lower prices instead of just shopping price. 4) Markup blind items to whatever the traffic will bear to further improve turn-earn results. And, 5) get back to creating and selling value for one target customer niche at a time.
But, the full-service players have typically done just Step #1 and otherwise complained to manufactures. Why not the other steps? Starting with Step #5 - without a clear customer focus resellers are still product, volume driven. For Step #2 - they think three to eight or more redundant lines is value-added, when the customer would rather have lower prices and higher fill-rates on lines 1 and 2.
For Step #4 - they are afraid to charge more than list on blind items, because it violates their "fair trade parent tape" and a customer might call them on it. Besides it is work to -- figure out who the customer really is; know what competitors are doing; and experiment with pricing. Why not just go back to 1968 practices? Who wants to be empowered, responsible and accountable to customer supremacy?
And finally, partnering for improved economics(Step #3) hasn't been a necessity in the US until recently. For 300 years, haggling and cost-shifting got us profitable growth because of positive economic accidents of history. Most people don't change until a crisis forces them to, and then it may be too late. What can manufacturers do?
TIME FOR A WAKE-UP CALL?
If manufacturers withdrew list pricing, what would happen? Discounters couldn't use "X% off MLP" advertising. They could offer "X% off regular price", but competitors could successfully threaten legal action if the discounter never actually sold items at that "regular price." Perhaps instead, they might drift toward EDLP (+) or "lowest price guarantees" which would allow manufacturers more room for brand building and reduce the deal pressure perceived by traditional resellers.
Some resellers might panic, which would be good. Anxiety opens minds and unleashes energy for doing what needs to be done. Having created a new set of needs, manufacturers could then take the high-road in helping resellers pursue the five step program previously mentioned. At the wholesale level, for example, grocery, drug and hardware wholesalers have for some time offered computer based, "matrix pricing" services for a profitable, unbundled fee to their retailers.
Manufacturers might still have to come to grips with high, net prices that are being offset by discounting tactics. All should study and monitor P&G's total program, it suits the times and may well generate the best long-term results for many firms. Change is work and has risks, but not as much risk as perpetuating the past.
Article 1.7, D.O. Essay #5