Strategic Movements: September 2019
J.M. Smucker Co Passed Input Savings onto Price Cuts. Profits?
They fell of course. Q2 2019 found that net sales (revenue) decreased 6%, and profits suffered more. From a pricing perspective, this is completely to be expected. Why would an executive do something proven to harm profits? CEO Mark Smucker spoke about the dramatic decrease in peanut and coffee costs, the increasing competition from store brands, and the need to increase marketing communication spending to drive revenue. In other words, Smucker Co is facing the declining importance of brands just as many of their CPG peers, but unlike some CPG peers, they haven’t quite found the right playbook for the times. I wish Mark Smucker well as he finds his footing.
Electric Car for the Masses
Volkswagen. Yes, that German company. The one caught in diesel-gate. Not that U.S. upstart company with a high valuation, heavy losses, and no profits in sight. Volkswagen unveiled ID.3 at the Frankfurt Auto Show, a $33,000 electric car that boasts driver-assistance technology and that is connected to the internet. Europeans can preorder today. It looks like the old automotive competitors are ready to displace the U.S. upstart. But who will buy the U.S. upstart and really take it out of its misery? Can’t say. The upstart is still overvalued.
Carole Tome Gets on the Profit Train
Carol Tome, ex-Chief Financial Officer of Home Depot, learned through pain of the importance of profit over revenue. In an interview with the Wall Street Journal, she stated “[We decided} our economic engine will no longer be driven by square-footage growth. It will be driven by productivity and efficiency coming off of effective capital allocation.” In other words, she and the team realized profits, not revenue, must be the key decision-making criteria for creating a sustainable and high-performing business.
Free to Paid Apps
Entrepreneurs often launch free apps in the hopes that customers will upgrade to paid apps. Does it work? No. Research by Arora, ter Hofstede, and Mahajan on “The Implications of Offering Free Versions in the Performance of Paid Mobile Apps,” appearing in the Journal of Marketing, demonstrates that the presence of free apps decreases the adoption of paid apps. Free apps cannibalize sales of paid apps. We learned this in the 90’s with respect to desktop software. It is odd we have to relearn it with smartphone apps. Bottom line: If you offer a free version, don’t expect to earn money from upgrades. Instead, look for in-app purchases or advertising. It is hard to earn money when you sell things for free.
First-Time Buyer Discounts Lead to Long-time Customer Profitability
Marketers often want to offer a first-time buyer discount in hopes of earning money over the customer lifetime. Does it work? Sort of. Research by del Rio Olivares, Wittkowski, and Aspara on “Relational Price Discounts: Consumers’ Metacognitions and Nonlinear Effects of Initial Discounts on Customer Retention,” appearing in the Journal of Marketing, demonstrates yes, if it is not too deep but deep enough. They studied a household insurance market (hence specific results will vary but shape is probably consistent). In it, they found that discounts below 5% were too small to register in the minds of buyers as worthwhile incentives and discounts above 35% were too large to set future price expectations correctly, leading to brand abandonment. Overall, revenues were highest between these two boundaries. Expect the boundaries to move but the overall shape to remain consistent as one switches between industries. If a discounting strategy is used to attract first-time buyers, you’ll have to find the Goldilocks discount: neither too high nor too low but rather just right. Many in business markets report that this approach is always a failure.