Carol Tomé Shifts the Focus
Which do you want: Market share or profits? Growth at all costs or profitable growth? To be big or to be profitable?
I often hear “we want both.” Unfortunately, you can’t have both. Business strategy and economics are about tradeoffs. You will have to choose.
CEO Decision: Pricing Goals
More specifically, the CEO must choose. This is a CEO decision. It affects shareholder relations, investment decisions, and stock value. It even determines the stock classification as being either “growth” or “value.” A senior manager may have a suggestion or input into this decision, but the real decider is the CEO. CEOs make this choice daily, and their choice influences the decisions and behavior of their direct reports and the entire organization.
A pricing expert or pricing vice president / director can enable the CEO’s decision to be implemented, but, in all truth and humility, we serve the CEO.
And, Carol Tomé, CEO of United Parcel Services Inc. (UPS), made a choice and had it implemented.
Carol Tomé’s Choice: Better, not Bigger
What was Carol Tomé’s choice? To focus on profits. Not size, footprint, capacity, or much less being all things to all customers, but profits. The results are positive in terms of good customer service, increased revenue, and improved profits.
Adjusted operating revenue was up 21% and operating profit was up 26% for Q4 2020 over same quarter last year. Yep, you read that right.
Granted, she had tailwinds that helped her achieve this, but also some headwinds. On the headwinds side, business package services, such as those sent to manufacturing plants of consumable parts or inventories to stores, were down 22%. On the tailwind side, ecommerce increased 32% in 2020 due to the pandemic and a secular trend towards ecommerce, which led to a 65% increase in packages sent to households.
But her results are not just about changes in the technological, economic, and cultural market environments. It is also about her strategic choice to be “better, not bigger.”
The “better, not bigger” mindset led to price changes. UPS added surcharges related to costs required to enable a safe work environment during a pandemic. UPS rewrote contracts midstream using a rarely before implemented perfunctory exit clause, which forced customers to either pay a higher price and accept new terms or find another service provider.
The “better, not bigger” mindset led to operational changes. UPS restricted service to the pre-planned and turned away demand above plan. UPS shifted their investment strategy from always adding greater capacity in a “build it and they will come” strategy to maximizing utilization of the capacity currently owned approach.
And the “better, not bigger” mindset led to better service. According to ShipMatrix Inc., UPS achieved 96.7% on time delivery in the 5 weeks prior to Christmas. This compares favorably to 95.1% at FedEx and 93.2% at USPS.
What’s Next for UPS
Carol Tomé’s path is not complete. She still has opportunity to seize along her better, not bigger path.
Specifically, she is aware that UPS’s 1.9 million customers need greater segmentation and pricing strategies aligned to achieve the most profit per segment.
Some large customers demand less services, such as warehousing, but provide a steady stream of business. That “large customer / low service” segment would be better attracted to an all-in price that is lower than normal. In contrast, other large customers need greater services, but even that segment can be further price segmented between customers that “pre-order capacity” and those that use the “spot market.”
Then we have small and medium-sized businesses. These businesses have less bargaining power (hence higher prices could be hypothesized to be effective), and some require a wide range of highly profitable services beyond package shipping (while others don’t).
Advanced price segmentation can even be performed at the customer level at UPS just as it is with many other large industrial companies. Experience demonstrates it isn’t a “one-shot and your done” effort. Rather, it is a continuous improvement effort in which the impacts aggregate. It can take years, if not decades, to fully optimize.
The stock market initially reacted favorably to Carol Tomé’s rise to the role of CEO and her planned strategy. Stock price rose from a range of $80-110 in the May to June 2020 time frame (before she fully took the helm) to the $160-$170 range in July 2020-March 2021 (after she took the helm). Perhaps the stock market has the impact of her strategy already baked into the stock price, but I would not be surprised to hear of even greater performance and stock market valuation over the next five years.