Kimberly-Clark and Weber Grills vs. Ailawadi and Farris: Stupid or Smart Pricing?

Kimberly-Clark Corp. (KMB) is “desheeting” its products to improve profitability.  Weber Stephen Products LLC avoids price promotions and markdowns on their grills, and yet maintains a dominant market position.  These are two rather disjointed activities but they both appear to fall afoul of the suggestions given in a recent Wall Street Journal article by Professor Ailawadi of Tuck and Professor Farris of Darden.  Are Ailawadi and Farris wrong, are the companies wrong, or can both pairs be right?

Kimberly-Clark

In the case of Kimberly-Clark, executives are desheeting the products (reducing the number of sheets of toilet paper or facial tissue per package) while holding retail prices constant.  For this industry, this is a common practice.  Competitors Georgia Pacific Corp. and Procter & Gamble have both desheeted products in the past.  (More on P&G’s recent pricing practices here.)

Desheeting has a track record of improving profits in this industry.  Kimberly-Clark attributes part of its ability to raise selling prices by 2% in the second quarter 2013 to its desheeting of Cottonelle and Kleenex.  During that period, profits rose 5.6% to $526 million though revenues were flat.

Coupled with the desheeting are improvements in product and increases in raw material costs.  Both of these activities are associated with enabling firms to raise prices.

• In terms of product improvements, the new Kleenex is reported to be a 15% “bulkier” product with 13% fewer sheets.  Presumably the bulkier product enables customers to get the job done with fewer sheets.  The product improvements may add value greater than the concurrent loss of sheets for most customers, thus encouraging customers to remain loyal.
• In terms of costs, prices for eucalyptus pulp, a key raw material in tissue for Kimberly-Clark, are up 3% this year.  Customers tend to be more accepting of price increases, and perhaps even hidden price increases in the form of product reductions, when input costs are increasing simultaneously.

Yet the entire approach of reducing products while maintaining prices appears to fall afoul of the suggestions by Ailawadi and Farris.  In their article, they state:

“Another mover that usually backfires: cutting how much product people get in a similar-looking package while charging them the old price.  … Why doesn’t this approach work?  … when customers discover that, say, the chocolate bar they just bought is smaller  but the price is the same, the backlash can be costly and visible.  People who feel that they’re being cheated or tricked can be very angry customers – and these days, social media give them an easy way to publicly voice their anger.”

So what gives?  Kimberly-Clark is successfully competing by doing exactly what Ailawadi and Farris say they shouldn’t do:  desheeting.

Weber Grills

In the case of Weber Stephen Products LLC, this grill-making company is known for avoiding discounting and markdowns in their highly competitive industry.  To further discourage price promotions in retail channels, Weber gives marketing dollars to retailers for maintaining minimum selling prices.

This “let’s not discount” approach has a successful track record for Weber.  They hold roughly 35% of the $2.8 billion grill market (Euromonitor International research), or more than twice as much market share as their next nearest competitor.

Coupled with their price-promotion-avoidance strategy are a quality product strategy and a quality retail experience strategy.  Both of these activities are associated with enabling a firm to maintain a premium price position.

• Weber grills consistently gain top-quality ratings from independent product reviewers such as Consumer Reports.  (I myself enjoy the functionality and control all three of my Weber charcoal grills deliver.)  Products delivering higher benefits tend to be associated with products customers are willing to pay more for.
• Weber avoids selling through warehouse chains, and develops its relationships with retailers that provide a superior shopping experience.  Research has shown that the sales of higher-quality and higher-priced goods improve when the value of the product is communicated or demonstrated in the sales process itself.   The choice of avoiding low-end retail channels supports Weber’s price position.

Yet the avoidance of discounting appears to fall afoul of the suggestions by Ailawadi and Farris.  In their article, they state in big bold letters:

“The Big Mistake: Slashing Promotions”

So what gives?  Weber Stephen Products LLC is successfully competing by not doing what Ailawadi and Farris say they should do: price promotions.

What Gives?  Context

Ailawadi and Farris are both solid researchers in the field of pricing and marketing for consumer product manufacturers and retailers.  Their suggestions are, in general, sound, as their own research and the research of others will attest.  But generally sound statements of advice are not necessarily universally applicable rules that tie cause and effect.

Yes, in general, firms should avoid irritating their customers by reducing package size while maintaining prices.  But just because this is generally true doesn’t mean it is true for all cases.  Even Ailawadi and Farris make this point in their article in referring to situations where firms have made smaller packages a virtue.

Yes, in general, firms should use price promotions and discounting to both simultaneously improve profits and market share.  As we have argued before, price promotions and discounting can be forms of profit-enhancing price segmentation.  But again, just because this is generally true doesn’t mean it holds across the board.  Many firms relentlessly avoid price discounts and exhibit well-above-average profitability, and firms more often tend to be guilty of overusing discounts and leaking profits than they are of being too stingy with discounts.

The point is pricing isn’t a cut-and-paste operation.  It is a strategic challenge.  What holds in some situations does not hold in others.  Thus Kimberly-Clark may be smart to desheet its products while most other firms should avoid product-size reductions, and Weber is smart to avoid price promotions while other firms should take a measured approach with their price promotions and discounting policies.

Pricing strategy must match corporate strategy, fit within the context of the competitive landscape, and adjust to geographic changes, economic conditions, political and legal rulings, social and cultural shifts, and technological developments.  The fit of a firm’s pricing strategy and tactics to these corporate and marketing strategy issues is a better gauge of their appropriateness than any list of general suggestions.

In other words, neither throw the baby out with the bath water nor jump in the pool before looking.  Ailawadi and Farris provide generally sound advice and Kimberly-Clark and Weber Stephen Products LLC have found ignoring this advice to better fit their situation and their strategy.

Note of Interest and Holdings: At the time of writing, the author is not currently a direct consultant to nor investor in any of the firms listed in this article.