Strategic Movements: May 2019


Tim J. Smith, PhD
Founder and CEO, Wiglaf Pricing

Published May 24, 2019

Pepsico: Nationally Advertise or Locally Discount?

SGA at Pepsico was up a modest 1.7% for Q1 2019 over same quarter last year.  Management called out increased advertising expenditures. Results: Organic revenue was up 5.2%. Investors responded with a 4% stock value increase on day of results release.  Key message:  Yes, you really can reduce discounts and rebates in favor of national brand advertising to achieve higher sales, and run a more profitable and sustainable business.  Well done CEO Ramon Laguarta, CFO Hugh Johnston, and Beverage CEO Kirk Tanner.

Apple Customer v. Qualcomm Supplier

Usually, suing a prime customer is a bad idea. Qualcomm has been arguing with Apple regarding its patent use and pricing for more than two years.  Intel stepped in, threatening Qualcomm’s future. Many expected Apple to flourish and Qualcomm to flounder.  Qualcomm had other ideas.  In response, Qualcomm invested heavily in 5G, outpacing all other vendors in many ways.  Result: Qualcomm has put itself in front of the moving train and made itself indispensable.  Apple and Qualcomm resolved most of their differences in April 2018.  Qualcomm is back in.  Intel is back out.

Elon Musk:  Follow the Narrative or Observe the Truth?

Tesla Model 3 sales volume underwhelmed expectations in Mid-April. SpaceX capsule was damaged in weekend engine tests, spewing smoke.  How to respond?  Elon Musk touted the future of self-driving cars and his strategy for deploying them.  If the truth is unpleasant yet you have fan followers, can he simply change the narrative by talking about a brighter future, again?

P&G Raised Prices Last Summer. Results?

Proctor and Gamble, makers of Pampers, Bounty, Tide, and Gillette, publicly raised prices starting last summer by 4% to 10% citing increased costs (threatened paper tariffs).  Competitors Kimberly-Clark who makes Huggies and Scott, and Unilever followed their price leadership.  Results: P&G revenue was up. Branded consumer packaged goods are realizing their brands have value, and that competing with private labels head-on is a bloody proposition. Brand hay-days of the 50’s and 60’s may be over, but that doesn’t mean the brands are dead.  In line with a bottle of Pantene but with BCG Matrix terms regarding cows: nurture, milk, repeat.

Whirlpool Raised Prices Last Summer. Results?

Whirlpool has been raising prices in response to increased costs (steel and aluminum tariffs).  Higher prices and trade tensions dampened demand. Unit sales were down 7%. Revenue increased by 0.7%.  Profit increased from $94 million to $471 million. CEO Marc Bitzer is navigating these tricky waters well.

Price Metric for Air Travel

On broad scale measurements, the price structure for air travel,  appears to be a function of service class, square inches, and distance.  Domestic U.S. flights are priced at $0.80 per square inch for economy and $1.75 per square inch for first class.  International flights from U.S. to E.U. are priced at $2 per square inch for economy, and $4 per square inch for first class.  Delta reports selling 60% of their domestic first class seats in 2018, up from 14% in 2011.  Always look for the price structure, not just the price point, to drive profitability.  This structure seems well aligned to the benefits delivered.  Service, space, and distance.

Cruise down Revenue Management

Cruise Lines International Association is predicting demand increase of 6% for 2019.  Royal Caribbean Cruise applied yield management techniques (Chapter 14 of Pricing Strategy) to raise prices by 7.5% to 9%.  This is what a proper price structure, pricing organization, and pricing tools are expected to deliver: Capture price when opportunity arises, manage price when exigencies demand.

Product Category Life Cycle Pricing

Google to produce a defeatured smartphone at $400. The Google flagship Pixel 3 is $800 and up. Both Apple’s iPhone XR and Samsung’s Galaxy S10 are currently $749.  Is Google’s move rational?  Yes.  As discussed in Chapter 16 of Pricing Strategy, price points expand as product categories mature.  The smartphone market took off in 2007.  It has been over a decade.  This market is clearly entering the mature stage, and we expect more suppliers to explore different price points and feature versioning preceding the commodification phase of this industry.

About The Author

Tim J. Smith, PhD, is the founder and CEO of Wiglaf Pricing, an Adjunct Professor of Marketing and Economics at DePaul University, and the author of Pricing Done Right (Wiley 2016) and Pricing Strategy (Cengage 2012). At Wiglaf Pricing, Tim leads client engagements. Smith’s popular business book, Pricing Done Right: The Pricing Framework Proven Successful by the World’s Most Profitable Companies, was noted by Dennis Stone, CEO of Overhead Door Corp, as "Essential reading… While many books cover the concepts of pricing, Pricing Done Right goes the additional step of applying the concepts in the real world." Tim’s textbook, Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures, has been described by independent reviewers as “the most comprehensive pricing strategy book” on the market. As well as serving as the Academic Advisor to the Professional Pricing Society’s Certified Pricing Professional program, Tim is a member of the American Marketing Association and American Physical Society. He holds a BS in Physics and Chemistry from Southern Methodist University, a BA in Mathematics from Southern Methodist University, a PhD in Physical Chemistry from the University of Chicago, and an MBA with high honors in Strategy and Marketing from the University of Chicago GSB.