The Hindu Business Line : Price is the mirror of value

In any mature market, it is wrong to be guided by market share or sales volume, says a new book from Harvard Business School Press (www.HBSPress.org) . Such a focus can rob the companies of their earnings, to the tune of 1 to 3 per cent, aver the authors Hermann Simon, Frank F. Bilstein and Frank Luby in Manage for Profit not for Market Share.

The book is not just about adding to your profits, but about survival. Because "the real aggregate profit margins of companies in most developed industrial countries lie dangerously close to zero." Eroded margins are the result of a culture of aggression and price wars. For instance, "Price actions cut Dell's profits by an estimated $2 billion and turned the industry into a `profit wasteland'." That is the destructive side of marketing, rue the authors.

"Openly aggressive companies take destructive actions to gain share from competition, while acquiescent ones take destructive actions to preserve market share positions." An example of such an action is to train sales and marketing teams "to make concessions (better value, lower prices) whenever the customer makes a threat to take business elsewhere."

Instead, learn to compete peacefully, exhorts a chapter. "Business and war differ in two critical aspects: first, war always ends, but competition never does; second, there are no customers on a military battlefield." Business is not a covert operation, remind the authors. "You are trying to attract and keep customers, not capture fugitives or disable opponents."

Peaceful competition is the science of profitable differentiation, they explain. "Picking the right fights and conceding the right market share involves much more than taking a cursory look at basic market data, listening to the war stories your sales force tells, and making some snap judgments about your competitors' next moves." The book helps you with tips on constructing a competition map.

`Change the way you form your assumptions,' counsels another chapter. "It is always easier to retool your thinking - your assumptions about what your customers want and what they're willing to pay - than to retool the actual products and services you offer." Base your views of customers on facts, rather than on conventional wisdom, which is "any idea, notion, or rule of thumb that managers apply reflexively and without question."

Yet another chapter highlights the importance of internal data as a mine for profit opportunities. These data can be of two types, status and response. Status data are about volume, price and cost by region, product, sales representative and customer. Response data include "price elasticities, advertising effectiveness, and sales effectiveness." The greatest gains come from generating response data, says the book, citing John D.C. Little's work.

`Raise your prices to get the profit your deserve,' advise the authors. Isn't it risky to raise prices? Yes, but price is the mirror of value, they argue. "It is your instrument for extracting value from customers." Of great value is a price/value chart with `consistency corridor' that the book describes. "Companies with hidden profit potential often find their products and services far below the consistency corridor."

Changing from market share to profit needs a cultural shift, concedes the epilogue. "Sustained success is largely a matter of focussing regularly on the right things and making a lot of uncelebrated little improvements every day," reads a quote of Ted Levitt, cited by the authors. "You will continually find room for improvement on your way from good profit performance to peak profit performance," they assure.

Contrarian and intuitive.

http://BookPeek.blogspot.com

D. Murali