On 16 September, Outerwall Inc. (OUTR), the owner of the Redbox, Coinstar, and ecoATM kiosk businesses, downgraded their performance guidance for Q3 2013 in announcing roughly $50 million in reduced revenue expectations and $30 million in reduced profit expectations. Investors reacted the next morning with a selloff that reduced the stock value from $56 to $49, effectively wiping out $200 million in market value for Outerwall Inc. With Outerwall owning over 42,000 Redbox kiosks and achieving 14% growth rates with 48% market share in the physical video market, did investors overreact? And what caused the poor performance expectations in the first place?
Price Promotion Policy
Scott Di Valerio, CEO of Outerwall Inc., cited price promotions as a major culprit in the performance shortfall. He isn’t the first CEO to find discounts and promotions failing to increase revenues sufficiently to offset the price reduction, and I doubt he will be the last. But what guidance can we give Di Valerio, his staff, and his shareholders?
Price promotions are tricky. The case study of Abercrombie and Fitch and price promotions (ANF) demonstrated that price promotion policy, more so than other forms of marketing communications, should be driven by the strategic positioning and goals of the firm. The case study and spreadsheet calculator of the effectiveness of a Groupon promotion demonstrated that an accurate evaluation of the effectiveness of price promotion policy goes beyond the associated costs, revenue, and profits generated to include a critical measurement (or at least estimate) of the change in purchasing behavior of those who respond to the price promotion. And, the research by Homburg et al. revealed that these strategic and technically difficult pricing decisions should stretch beyond any single functional silo and engage a broad cross-functional swath of the organization.
If proper price promotion policy engages corporate strategy, requires organizational coordination, and relies upon technically difficult calculations, then getting all these parts right is never going to be easy.
Will Outerwall Recover?
Crucial to the question of whether investors overreacted is the question of “will Outerwall recover?” Upon reviewing the guidance statement from Outerwall, it appears highly possible.
Outerwall identified the nature of its error: price promotions. Identifying the challenge is always the first step to finding a solution.
Outerwall is currently implementing a CRM system to enable the necessary but technically difficult measurements of changes in customer behavior in response to price promotions (and other promotions). With the insight such a system could provide, future missteps are likely to be less noticeable. Unfortunately these improvements may take more than a year to be fully realized.
Fortunately, Redbox, as the introduction noted, is still growing its distribution footprint on top of its currently significant market share. They are well positioned to manage a misstep and return to compete in the next round.
All of these facts indicate Outerwall can recover. But will it?
Crucially, this experience with price promotions represents a learning opportunity for Outerwall.
Getting price promotion policy right requires experimentation and organizational learning. Some experiments will reveal a path to growth and profitability. Others will reveal a destructive dead end. Taken as an experiment that failed to achieve the desired outcome, Outerwall should learn and move forward.
Yet learning doesn’t mean scrapping all future price promotions. Yes, the specific approach Outerwall took to price promotions was inefficient. It both squandered profits and failed to induce the desired purchase volume – as many price promotions and discounts do. Yet that does not mean that all future price promotions should be scrapped.
Done right, price promotions are a form of price discrimination. As argued many times before, price discrimination can improve profits and broaden the ability of the firm to serve customer needs. As such, they should not be dismissed out-of-hand nor accepted carte-blanche. Rather, they must be managed.
Opportunity and Management- Fundamentals of Corporate Investment
In Business Plans that Win $$$: Lessons Learned from the MIT Enterprise Forum, Rich and Gumpert note that investors dominantly evaluate ventures in two critical dimensions: (1) What is the opportunity? (2) Can management pull it off?
In terms of opportunity, none of the facts examined in this article reveals a diminishment of Outerwall’s opportunity. As such, the selloff may be attributed to fickle investors making a misguided judgment, implying that the stock should recover. Other forces are at work in the market, such as the resurgent Netflix and actions by Amazon, but these were at play before the guidance statement and are at play afterwards, hence they should not have caused a precipitous one-day 13% drop in market valuation for Outerwall.
In terms of management, I hope Di Valerio champions the necessary improvements in Outerwall’s price promotion policy. The loss of $200 million in market value should sharpen his mind. But an overreaction which kills all price promotions could be equally disastrous as a possible underreaction which drives no changes.
Humbly, I admit I can’t read Di Valerio’s mind nor do I know what challenges are on his plate. Yet hopefully, someone will get him this message: Kind sir: your firm’s price promotion policy needs your direct attention and no, the matter cannot be delayed until the completion of current projects nor can you leave it wholly in the hands of your subordinates, and killing all future promotions isn’t likely to be the right response either. When trying to right a ship, you can’t oversteer nor leave it to the fates.
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.