Strategic Movements: September 2017


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

Published September 14, 2017

Amazon Repeats Price Competition Strategy with Groceries

It is no surprise that Bezos would use price competition with his newly acquired Whole Foods, as that has been his standard strategy for the past 20 years.  But will it pay off?  For a stand-alone business, it only pays off if the firm has a competitive advantage and some pricing power (lower costs and more desirable offerings). Amazon may have some pricing power, but it is hard for me to believe they have a serious cost advantage in groceries.  As such, this is a costly game with unlikely payoffs.  How long will investors let Amazon play a market-share grab at the expense of profits?  If it weren’t for Amazon Web Services (AWS), would Amazon be a good investment?  If AWS is the only good piece of business at Amazon, should investors push for a break-up to release its value?  Tough questions. But incomplete.  Consider the emerging war between Amazon and Walmart, and the game makes more sense.  They’re two companies reaching the mass U.S. consumer market, but with very different path dependencies.

Novo Nordisk learns of Soft Economic Benefits

Novo Nordisks launched Tresiba at 60%-70% higher prices than their prior insulin treatments to few takers.  Challenge: The added value of “convenience” and “flexibility” were too soft as measured against patient outcome.  Result: Too few were willing to pay the differential price.  Some differential benefits are clear and result in hard economic value.  Other differential benefits are unclear, squishy, and suspect resulting in softer economic value.  Separate the clear from the unclear when making your model of the Exchange Value to Customer.

Pharma Market Failure: EpiPen

The Wall Street Journal ran an excellent report on EpiPen and Channel Pricing for the pharmaceutical industry.  It looks like a market failure with misaligned incentives.  Don’t expect any real changes during the current administration though. For now: Mylan can make hay.

Questions for Tyson

Tom Hayes, CEO of Tyson stated, “we’re essentially busting at the seams” regarding demand for bacon and chicken strips.  Yet, profit was flat to slightly down to $447 from $484 over same quarter last year.  Last I checked if demand is up, suppliers should raise prices and increase their profits—a lesson that continues to evade the automotive industry.  Is it evading Tyson?  I know they have smart people there in pricing so I will, for now, accept the indications that this is a temporary operational challenge.

Avis Feels Price Pressures

Yep, Avis is blaming competition and industry overcapacity for lower profits. Big question: cyclical due to low-used car prices or trend due to the rise of Uber?  Suspect it is both, along with surmising a pricing review will soon be commissioned.

Wendy’s is In the Game

Wendy’s achieved another quarter of same store sales growth.  Was it their sassy social media campaign that reminds detractors of the existence of refrigerators?  Was it their new menu items?  Or was it the fast food chain’s competitive pricing? Of the three, I think it was their social media campaign that propelled otherwise strong product and pricing strategy to outperform.

Verizon Shows It Can Buy Market Share – Smartly

Verizon starting selling unlimited plans in response to aggressive marketing by T-Mobile.  Over 600 thousand people switched.  The new offer attracted 59% of Verizon’s current customer base, eating deeply into overage-fee revenue.  But, on the plus side, net income increased to $4.4 billion from $0.7 billion the same time last quarter.  Sounds like a small give for a large get.  Smart discounting?

Intel Still Strong

At Intel, revenue rose 14% as profits increased from $1.3 billion to $2.8 billion over same quarter last year. Performance was partially attributed to sales of chips for personal computers and industrial servers, where it holds 93% and nearly 100% market share respectively.  This is despite the long-trend downturn of the PC market, and the rising competition from Nvidia, and now Advanced Micro Devices in the server market.  Better interpretation: Intel is using its pricing power.  Bigger question:  Can Intel intelligently invest that cash to win the coming connected car, Internet of things, and smart phone markets?

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.