Are you being creative in improving your profits?

The Practical Power of Pricing in Promoting Profit

Personal and concrete reflections by ANDERS REHNBERG

February 15, 2012

The State of Creativity

“A one per cent Price increase means a 12% Profit improvement”

Price as a lever for increased profits has been well understood by many top-level executives in the industry for a long time but it still amazes me how often I can surprise senior managers by showing scenarios in spread sheets that outline the impact of even modest price movements on their company’s profits.

There is a wide-spread lack of activity and creativity in the area of Price in most companies, even though this is an area where they could ‘carve gold with a small knife’ as we say in my native Sweden.

I have been preaching ‘creative pricing’ (not a relative of ‘creative bookkeeping’) for over 20 years and I cannot really say that the overall understanding of Price in the industry has improved much at operative levels, except in companies I have worked with naturally.

The same company executives who would never turn down a technical challenge to improve their Network Equipment or stream-line their Preventive Maintenance Service will say it is impossible when asked to find a way to increase prices in the Market.

The creativity goes out the window when confronted with Price.

Real life Story: 15% Price Increase of a Commodity without Volume Loss

When I took over a small (60 people) UK manufacturing operation many years ago, trading in window blinds, I was faced with the immediate problem of depressed pricing. I needed to quickly find a way to improve overall price levels, but with a fairly standard product and 1055 competitors (according to listings in Yellow Pages) it seemed difficult – unless you knew how to apply commercial creativity!

I correctly estimated that my customers (blind shops in the London area in the early 90´s) were less used to metric measurements, seeing that all the price lists and documentation in this industry was done in imperial measurements by tradition , furthermore I specifically noted that the "centimeter" was the least known metric measurement. Therefore I updated all the companies´ pricelists, showing ‘width’, ‘drop’ and ‘price’, in a nice new glossy format; showing all the measurements in centimeters AND increasing prices by 15%!

The change in usage of measurements lead to several complaints from blind shops, no complaints were heard about the increased prices. The public, who was being recommended the blinds by the blind shops were not price-sensitive, therefore the company did not lose any sales due to my price move. Needless to say it did wonders for my profits.

Fear of Failing

As an Applied Physicist by training I was used to being scientifically creative, over the years I have found that this skill can be applied equally well to commercial problems – the same brain cells are being used.

Another aspect of Pricing is the fear of losing volume, “but if we increase our prices then customers will go elsewhere” is a common heard worry. This is notwithstanding the proof that I am able to show, that in most cases the volume loss they would have to suffer would have to be enormous to reduce profits ("you can lose up to 1/3 of your volume when you increase prices by 10%").

On the brink of bankruptcy this this fear can be overcome.

Curious how creativity works in practice: read the case study from this Expert White Paper
Link under Price Management.

Analysis - Prices and savings shield food groups from milk surge

Price increases in emerging markets and cost-cutting will help Europe's biggest food groups avoid a profit hit similar to that of the last milk crisis of 2007 when their dairy costs soared.

Swiss Nestle and Paris-based Danone are more exposed to milk costs than to other commodities, and prices have been rising this year due to strong emerging market demand and lower production in Europe and North America.

Nestle is the world's biggest milk buyer for its products such as Nido milk powder, Coffee-Mate and Cailler chocolate, while Danone has nearly two-thirds of its sales in dairy products such as Activia yoghurt and Actimel drinks.
There are also some fears that rising grain prices due largely to drought and an export ban in Russia will add to the pressure on milk prices as European farmers feed more grains to dairy cattle during the colder winter months. But analysts say the rise in milk prices is showing sign of cooling and the highest prices this year were well below 2007's peaks, even if it pays to keep a careful eye on Danone as milk accounts for more of its input costs than in the case of rivals.

"In terms of size Nestle has most exposure to milk. However, given the concentration of its portfolio Danone will be impacted most from higher milk prices," said analyst Jon Cox at Kepler Capital Markets in Zurich. Danone has recognised the rise in milk prices by raising its forecast of milk cost inflation in July to 10 percent for 2010 from 5-7 percent previously, but has also added that prices had peaked in the early summer and were now trending down. Analysts say milk accounts for 38 percent of Danone's raw material costs, 23 percent at Nestle and 6 percent at Unilever Plc/NV, and buying forward is quite difficult for liquid milk and companies often buy directly from farmers.

This means liquid milk prices can be more volatile than the more widely traded skimmed milk powder, and here Danone is the most exposed as the need for fresh milk is greater at the French yoghurt group, while Nestle is able to buy half of its requirement as milk powder for its milk drinks and chocolates.

Nestle, the world's biggest food group, spent 5 billion Swiss francs on milk in 2009.
"Dairy is one of the areas where we are seeing an escalation in costs and therefore it's one of the areas where you are likely to see some pricing action," Nestle finance director Jim Singh told an investor roadshow this month.
European Union milk powder prices peaked at around $5,500 (3,529 pounds) a tonne in 2007 falling to around $1,700 in early 2009 before edging back to just below $3,000 currently, and analysts say milk powder does give a pointer to future liquid prices.

"On the whole, milk prices have become much more volatile over the last two years which is due to the fact that the European Union intervenes less on milk prices," said Dieter Mirbach, manager of industry group European Dairy Farmers.
NOT SUCH A BIG ASK Danone raised its prices following the 2007 milk price surge, only to cut them in the middle of 2009 when costs fell, so analysts say investors are right to be wary when Danone starts raising prices in such a volatile market.

Analyst Alex Molloy at Credit Suisse said 40 percent of Danone's dairy sales are in emerging markets where general inflation runs at around 5 percent and so pushing up price is not such a big ask. Analyst Pablo Zuanic at Liberum Capital said United States liquid milk prices are starting to come down and West European prices are also peaking, and an LTO Nederland survey of European milk prices for July due on Sept 3 may confirm this.

The survey showed average European milk prices in June were up 23 percent year-on-year at 30.26 euros per 100 litres to reach an 18-month high. However, if prices have peaked then Zuanic says a Danone price rise of just 2 percent in Western Europe in the second half of 2010 will be needed.

"We continue to argue the price increase "needed" by Danone in Western Europe for the second half is quite manageable," he said. Pressure on Danone may intensify if grain prices continue to rise with Orianne Segaud at Natixis saying, "If wheat prices continue to rise, Danone has the least protection as it is the most exposed to liquid milk prices with no hedging mechanism." But New Zealand, the world's largest milk exporter largely through butter and milk powder trade, produces its milk from grass-fed livestock without any cereal-based supplement so any grain price rise will not affect production costs.

Barry Callebaut, the world's largest chocolate maker which counts Nestle and Hershey among its clients, is one of the top three users of milk powder in Europe but has been relatively insulated from price rises as it uses no fresh liquid milk in its chocolate production. Anglo-Dutch Unilever's main milk usage is at its world leading Cornetto, Magnum and Ben & Jerry's ice cream operation but it is a smaller milk buyer compared to Nestle and Danone.

Source: Reuters

Heineken raises beer prices to make up for falling demand

Heineken today said it was expecting beer consumption to fall in many parts of the world but will look to increase prices.

The company, owner of Scottish and Newcastle breweries, suffered last year as people cut down on beer drinking in the recession but pushed through price increases.

“The global economic environment will continue to lead to lower beer consumption and down-trading in a number of regions in 2010,” Heineken said.

The Dutch company, which also brews Amstel beer, said it was committed to maintaining or raising prices and would pass on excise duty rises — although increases this year will not be as steep as in 2009. Breweries' ingredients costs will fall because of a decline in the price of brewing barley, but Heineken said this would be offset by higher energy and marketing costs and rising advertising rates.

Heineken said underlying profit rose by 14 per cent on a like-for-like basis to €2.095 billion last year, broadly in line with forecasts, despite a 5.4 per cent fall in underlying consolidated beer volumes. A 4.5 per cent improvement in pricing and sales made for a 0.2 per cent drop in revenue. The figures were helped by a €155 million saving from Heineken's three-year cost-cutting programme.

Rival London-listed SabMiller said last month that its underlying beer volumes were flat in the last three months of 2009 as demand in emerging markets offset declines in Europe, North America and South Africa. Heineken's pain has been greater than its peers given that 70 per cent of its operating profit comes from Europe and North America. It has increased its emerging market presence to 40 per cent by buying the beer business of Mexico's Femsa.

Europe Ahead: European prices hover near 1% amid recovery signs

Prices in the euro zone decelerated as a consequence of the global downfall that had caused a massive contraction in sectors and slowdown in economic activities. However, with the improvement witnessed recently and the remarkable signs of recovery, prices started to incline leaving the negative areas and heading toward the target level set by the ECB.

Inflation became positive in November for the first time since April and the incline continued in December, seen by the flash estimate indicator which rose to 0.9% from 0.6%. Today, the euro area will release its CPI for December with expectations to come in line with the flash estimate.

The reading was spurred by the rise the general price level in the largest four economies in the euro region, where the reading approached 1% where Trichet expects inflation to remain close to in the near term.

Trichet in the press conference following the rate decision for January, said price pressures will remain subdued and inflation will stabilize over the medium term, as monetary measures confirm low inflation pressure.

Prices benefited from the oil's rally, which after sliding to a low below $33 a barrel in February last year, jumped to highs around $80a barrel in December as an outcome to the pick up in global demand and the dollar's depreciation.

In addition, the monetary measures adopted by the ECB to enhance prices and rekindle growth succeeded, so far, in lifting prices to the upside. These measures spurred economic activities and caused the economy to leave recession in the third quarter by expanding 0.4% and it is on its way to expand more in the fourth quarter, according to the strong data released in the last three months of 2009.

Yesterday, ECB members met to set the interest rate where they left the rate unchanged at its historical low at 1%. The cost of borrowing is expected to remain low this year to support the nascent recovery. Some analysts are expecting a rise to 1.5% by the end of 2010.

Trichet mentioned that excess liquidity will be absorbed when necessary and they will continue exiting stimulus measures and he will call national European governments to implement fiscal exit strategies. Thus, we might witness a gradual scale back to the non-standard measures and a rise in interest rate; depending on the performance of the economy on the coming period.

ECB sees the economy will expand at a moderate pace in 2010 and recovery will be "uneven", as factors supporting the economy are temporary. Also, the ECB governing council is expecting slightly positive growth on average.

The euro area benefited from the rise in exports in expanding in the third quarter, but the appreciation in the value of the euro capped gains. Today, the ECB will release its trade balance for November where expectations are referring to a decline in surplus to 7.0 billion euros from 8.8 billion euros, while the seasonally adjusted is expected to retreat to 5.0 billion euros surplus from the prior surplus of 6.3 billion euros.

In November, the 16-nation currency jumped to a high of 1.5144 against the dollar, which probably affected European sales overseas as commodities became expensive relative to their U.S. counterparts.

The ECB announced in November that the European economy will grow 1 percent in 2010, higher than the previous projections of 0.3%; while in 2009, the economy may contract 3.9% instead of 4.5% contraction predicted in August.

Source: 2009 ecPulse. All Rights Reserved.

Price increase at Brewery Haacht

Brewery Haacht (Co.Br.Ha), manufacturer of the 'Primus' beer has decided to raise its prices. The company points out that the beer prices has been kept unchanged for thirteen months and argues that the two largest brewers in Belgium already increased their prices eight months ago. Haacht said it was inappropriate in times of crisis to implement a price increase. Because the turnover of Haacht decreased slightly this year, a price increase could not longer be avoided. Haacht also noted that having a lower price meant a disadvantage against competitors who have more resources available for consumer actions. They have decided to increase prices by 4%. This means that a glass of beer at the bar would be € 0.05 up to € 0.10 more expensive.

Brouwerij Haacht (Co.Br.Ha), de producent van onder meer Primus, heeft beslist zijn prijzen te verhogen. Het bedrijf merkt daarbij op dat Haacht de bierprijzen dertien maanden lang ongewijzigd heeft gehouden en voert aan dat de twee grootste brouwers van België acht maanden geleden hun prijzen al verhoogden. Haacht zei het toen ongepast te vinden om in crisistijden een prijsstijging door te voeren. Omdat de omzet van Haacht dit jaar echter licht is gedaald, kon een prijsverhoging echter niet langer worden vermeden. Ook wordt erop gewezen dat de lagere prijs een nadeel betekende tegenover de concurrenten, die meer middelen hebben voor consumentenacties. Beslist werd om de prijzen met 4 % te verhogen. Dat betekent dat een glas bier of café € 0,05 tot € 0,10 duurder zou worden. (MH)