Big Energy Firms Face Pricing Clampdown - skynews March 21, 2011

Big Energy Firms Face Pricing Clampdown Article from: - skynews March 21, 2011

Gas and electricity suppliers have been accused of failing consumers by the regulator Ofgem which has proposed to sweep away "complex and unfair pricing practices".

After a review of the domestic energy market, Ofgem decided that complicated price tariffs and bad behaviour by suppliers have been stifling competition.

Ofgem chief executive Alistair Buchanan said: "Energy companies have failed to play it straight with consumers and so Ofgem is proposing to break the stranglehold the Big Six have over the electricity market.

"Consumers have told us that energy suppliers' prices are too complicated.

"It is no surprise that they are bamboozled when tariff complexity has increased from 180 to more than 300 since 2008.

"That is why we are planning to sweep away this complexity so suppliers' prices are fully exposed to allow easy price comparisons."

Ofgem is proposing to break the stranglehold the Big Six have over the electricity market.

Chief Executive Alistair Buchanan

The Big Six are British Gas, e.on Energy, EDF Energy, Scottish Power, npower and Scottish & Southern Energy.

Ofgem said that, for the first time, it had evidence that the suppliers had pushed up prices in response to rising costs more quickly than they reduced them when costs fell.

It launched its review in November after it emerged that price increases had seen suppliers' profit margins soar by 38%.

The regulator has given them eight weeks to reform the way they operate or it will refer them to the Competition Commission.

To avoid referral, it has asked suppliers to comply with a series of proposed reforms beginning with less confusing tariffs to allow customers to compare prices more easily.

Major companies would also have to auction up to 20% of the energy they generate to other suppliers to stimulate competition in the market.

Scottish and Southern Energy (SSE) said the proposals represented "potentially radical changes" to the British energy market.

"While SSE believes the market is fundamentally sound, it will participate constructively in this next phase of review and consultation, the firm said.

Meanwhile, rival British Gas said it welcomed the move to "improve electricity market liquidity and transparency in the reporting of company returns".

Energy Secretary Chris Huhne added: "Consumers deserve the best possible deal, which means rough and tough competition in the marketplace."

The lobby group Consumer Focus claimed the structure of the energy market currently made it "nigh on impossible" for new companies to enter.

Chief Executive Mike O'Connor told Sky News: "Consumers have less confidence in energy companies than in any other sector - they feel that prices aren't fair, that tariffs are too complex and that the market doesn't treat them well."

"(Energy) companies are now on a very short leash. If they cannot show the will and capacity to change we would expect Ofgem to refer aspects of the markets to the Competition Commission."

Ofgem has also announced an investigation into whether Scottish Power charges unfair prices to customers who are not signed up to pay their bills by direct debit.

A Scottish Power spokesperson said: "We believe that our pricing is cost reflective and in accordance with Ofgem's Guidelines, but we will of course co-operate fully with Ofgem in the investigation and in reviewing their concerns."

Other investigations into the handling of complaints and mis-selling by other energy companies are continuing.

Video and Article http://news.sky.com/skynews/Article/201103115956854

Sobeys expected to follow competitors, hike prices - Article by ROGER TAYLOR in The Chronical Herald

Sobeys expected to follow competitors, hike 
prices (found at www.thechronicalherald.ca)

By ROGER TAYLOR Business Columnist

Tue, Mar 8 - 7:24 AM

We should find out today whether Sobeys Inc. will follow the lead of its competitors and raise food prices in response to inflation. All the signs suggest it will.

In the days leading up to its third-quarter results, out today, the Stellarton-based grocery chain, a wholly owned subsidiary of Empire Co. Ltd., was in a quiet period and could not respond publicly to the suggestion by competitor Loblaws that it’s expected to raise food prices.

In Empire’s second-quarter report, released in December, Sobeys did indicate it was willing to eat rising costs because it couldn’t afford to give up on competitive pricing at that time.

Sobeys president and CEO Bill McEwan told analysts during a conference call: "We have begun to see some commodity price increases but clearly we anticipate considerably more."

He said grocery prices at Sobeys had declined by about one per cent during the second quarter, which ended Oct. 30, 2010.

But since that time, dramatically rising fuel costs have been adding to the demand to raise food prices. That is why it is expected that Sobeys, Canada’s second-largest grocery chain, will re-evaluate the low- price strategy while remaining price competitive in an increasingly tough business.

Sobeys, market leader Loblaws and third place Metro, which together account for about 60 per cent of the Canadian grocery market, have complained in previous quarters that falling retail prices due to stiff competition were taking a toll on profits.

That is why food executives are hopeful consumers will be willing to accept at least some of the price inflation; otherwise, the companies will be forced to continue absorbing the increased costs, which will affect the bottom line.

When contacted for a comment on whether Sobeys believes it will be able to pass along price inflation to the consumer this time around, a company spokesman indicated management could not comment before today’s conference call.

However, I was referred to comments McEwan made at a CIBC World Markets conference in Toronto a couple of weeks ago:

"We remain committed to being price competitive in each market we serve. . . . We are seeing signs of balanced inflation starting, in which retail prices rise in step with manufacturer prices and the general cost of doing business. There appears to be an appetite for that to happen but we shall see. If we behave like a mature industry, it will happen.

"If we continue to pursue business that is not there, we will see continued deflation."

In the parent company’s second quarter, Sobeys reported strong profits despite heavy competition.

The grocery business in Canada is increasingly fragmented. It isn’t only the grocery stores selling food these days. Competition is coming from retail giant Walmart, drug chain Shoppers Drug Mart and even Canadian Tire has been experimenting with selling groceries.

In December, McEwan said he was optimistic the market would soon be in a position to hike prices in line with food inflation.

He also pointed out that some parts of the country have a more competitive retail marketplace than others, so price increases wouldn’t necessarily be felt equally across the country.

In the Toronto marketplace, for example, all companies are engaged in a cutthroat battle to gain market share that means the grocery chains will be watching each other very closely.

While no one wants higher food prices, it is important that Canada maintain a competitive retail food sector. In the end, competition is the best way to safeguard against unfair price rises.

It should be interesting to hear what Empire and Sobeys officials have to say today.

Loyalty Programs: A Defense Against New Competitors

Loyalty Programs: A Defense Against New Competitors 
by Michael Hurwich, President SPMG

Loyalty Programs generally help boost customer retention,

The following case study is a composite made up of the actual experiences of several companies that have adopted loyalty based pricing programs. It has been written to provide an example of a successful program while maintaining the confidentiality of the companies involved.

BACKGROUND

COMPANY (A), a dominant force in the high technology industry, was facing the entrance of a new competitor (Company D). At the time, there were two other significant players in the industry, and while (A) enjoyed a 75%+ market share, some customers were showing signs of dissatisfaction. Complaints that (A)’s dominant position in the market had led to arrogance and an inflexible attitude were becoming more frequent. Indeed, many buyers made no attempt to hide their enthusiasm for the impending entry of a new competitor for Company A. Against this backdrop; (A) began to search for a pricing strategy to defend itself from possible market share erosion while maintaining profitability.

THE DECISION TO LAUNCH A LOYALTY PROGRAM

            

In the search for a defensive pricing strategy, Company A explored the feasibility of implementing a loyalty program. While management was wary of the amount of time and resources that would go into implementing a loyalty program, they also recognized that a loyalty program might be their best defense against the new competitor, for several reasons.

For starters, a loyalty program would send a strong signal to customers that (A) was prepared to recognize and reward their loyalty in the face of new competition. This was an especially important message to communicate, given (A)‘s reputation for arrogance and inflexibility.

            

Management also realized that a loyalty program could be a tactic where pricing details would not be readily transparent to competitors. A loyalty program would thus be unlikely to incite immediate price retaliation from the new entrant. In addition, if successfully executed, the program would provide a long-term competitive advantage to (A) by discouraging customers from diverting business to the new entrant. Finally, management concluded that if they did not implement a loyalty program, the new entrant might.

            

The advantages of being first in an industry to implement a loyalty program are usually enormous. Once a customer has made a commitment to a particular program, it is often difficult to dislodge the customer‘s loyalty. (Consider how often members of a particular frequent flyer program go out of their way to fly with ”their” airline.)

DESIGNING THE LOYALTY PROGRAM

One of the first steps taken by Company (A) in designing the loyalty program was to hold a brainstorming session with the sales force to determine what products or services offered by (A) were highly valued by its customers and, at the same time, not replicable by any of its competitors. During the brainstorming session, the group identified (A)‘s breadth of product offerings as key to implementing a successful loyalty program. In essence, (A) was the only significant supplier of a full systems solution, encompassing both hardware and software. By leveraging off this dominant position, (A) management felt it could also promote customer loyalty.

PARAMETERS OF THE RPOGRAM

The program provided customer discounts based on three major criteria:

·         Percentage of (A)’s product bought relative to purchases from the competition

·         Volume purchased of a single product

·         Number of different products purchased.

THE RESULTS

This loyalty program was a tremendous success for Company (A). Not only was the potential erosion of both margin and sales halted, but many current customers actually increased their purchases. Moreover, although other competitors – including the new entrant – attempted to introduce their own loyalty programs, (A) had achieved the dual advantage of being first in the industry to implement a program, and designing a program based on features that were very difficult for competitors to copy.

 

Buffett Says Pricing Power More Important Than Good Management. By Andrew Frye and Dakin Campbell - Feb 18, 2011 12:00 AM ET www.bloomberg.com

Buffett Says Pricing Power More Important Than Good Management

ARTICLE FOUND ON WWW.BLOOMBERG.COM - Feb 18 2011

Warren Buffett, the billionaire chief executive officer ofBerkshire Hathaway Inc., said he rates businesses on their ability to raise prices and sometimes doesn’t even consider the people in charge.

“The single most important decision in evaluating a business is pricing power,” Buffett told the Financial Crisis Inquiry Commission in an interview released by the panel last week. “If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”

Buffett, 80, accumulated the world’s third-largest personal fortune through a career of stock picks and takeovers. He has bought companies such as railroads and electricity producers, whose pricing power stems from a dearth of competitive options available to clients. Buffett has also built stakes in firms like Coca-Cola Co. and Kraft Foods Inc., which rely on the appeal of their brands to attract and keep customers.

“The extraordinary business does not require good management,” Buffett said in the interview, which was conducted on May 26 in Omaha, Nebraska.

The FCIC investigators focused on Buffett’s investment in Moody’s Corp., the bond-ratings firm blamed by lawmakers for handing out inflated credit grades during the housing boom. Buffett said he held stock in Moody’s because the company’s leading market share, along with that of rival Standard & Poor’s, a subsidiary of McGraw-Hill Cos., gave the two firms flexibility in setting prices.

Pricing Power

“I knew nothing about the management of Moody’s,” said Buffett. “If you own the only newspaper in town, up until the last five years or so, you had pricing power and you didn’t have to go to the office.”

A dominant position can’t prevent a bad manager from destroying a company over time, said Benjamin E. Hermalin, a professor of economics at the University of California, Berkeley’s Haas School of Business.

“If you have a really dominant position you can survive for quite a long time with bad management but eventually it will catch up to you,” said Hermalin. “In the short run I would agree with Buffett but in the longer-run perspective there is something to be said for having a good manager.”

Burlington Northern Santa Fe, the railroad Buffett bought last year for $26.5 billion, owns more than 30,000 miles of track across the U.S. West connecting producers and distributors of coal, grain and consumer goods. Omaha-based Berkshire’s power company, MidAmerican Energy Holdings Co., sells electricity to homes in the Great Plains and transports natural gas fromWyoming to California.

Praise From Buffett

Buffett routinely singles out and praises managers from Berkshire’s more than 70 operating companies. MidAmerican Chairman David Sokol and Gregory Abel, the unit’s CEO, are “two terrific managers,” Buffett said last year in his letter to shareholders. The acquisition of Burlington Northern had the “additional virtue” of bringing the railroad’s CEO, Matthew Rose, to Berkshire, Buffett said.

Buffett criticized Kraft Chief Executive Officer Irene Rosenfeld last year for her takeover of Cadbury Plc and the sale of the foodmaker’s pizza brands. “Both deals were dumb,” Buffett told Berkshire investors in May. Berkshire is the biggest shareholder of Kraft with a stake valued at $3.3 billion at the end of December.

“In the short run, good management can make a stock pop but I follow what Warren’s saying, especially because his point of view looks at the fundamentals,” said Terry Connelly, dean of the Ageno School of Business at Golden Gate University in San Francisco, and a former managing director at Salomon Brothers. “Good management can’t do anything with a bad case.”

Pricing Czars vs. Institutionalized Pricing Strategy

Pricing Czar vs. Institutionalized Pricing Strategy 
by Michael Hurwich, President of SPMG

PRICING Czars. They sit in their offices, colossus' spanning the universe. Salespeople telephone them begging their indulgence as they present their deals – deals which could make or break performance bonuses and incentives. Discounts are requested, competitive information reviewed, special requests are considered and then, with pontifical certitude, a decision is rendered.

Anointed by the CEO, a price czar is the absolute final arbiter on any deal done on a day-to-day basis. Ideally, the czar is a competent and benevolent despot who will advance the cause of the organization.

Often they emerge within an organization over a number of years and are generally acquire considerable experience, a track record of selling success, and an intimate knowledge of customers. Eventually, by virtue of history, the organization turns to him or her, time and again, whenever a tough decision has to be made on a specific deal. This pattern can become so widespread and routine that the individual, de facto, becomes a pricing czar.

Sometimes the position is institutionalized by the CEO and the power to finalize deals is formally granted. This requires the absolute trust of the Chief Executive because any overturned decision has the potential to undermine the authority of the czar, perhaps irreparably. A successful pricing czar requires the absolute respect of the sales force; otherwise this individual can significantly demoralize their efforts in the field.

Advantage:

There are a number of factors to weigh when an organization is considering institutionalizing a pricing czar. The big attraction is that it provides a simple, quick fix to an often-chaotic pricing situation. The pricing environment is generally characterized by a lot more deal making, special off invoice discounts, and special service requests. If these special arrangements are not managed properly, pricing can quickly spiral out of control and result in an overall collapse of profitability. Rather than investing in the monumental task of installing sophisticated internal and external-tracking mechanisms supported by adequate controls, it is tempting to turn to “good old Charlie” who has been with the company since the dawn of civilization and make him a pricing czar. 

Drawbacks:

There are drawbacks to this position. 

1. Evaluation

One of the immediate ones is evaluating the performance of a pricing czar. No company has ever structured a test whereby half the deals are turned over to a czar and the other half are managed through a more sophisticated systems/management structure. So a lot of faith is required in the setup to sustain it over time.

2. Disconnect

A further difficulty comes when the organization wants to take a new direction with its overall marketing strategy. Often it will become apparent that brand managers, who develop the price positioning strategies and have ultimate profit responsibility, are not in control of, or possibly even aware of, the actual prices being paid in the marketplace. They quickly come to learn the limitations of developing marketing strategies with only three of the “4 Ps” at their disposal.

3. Continuation

With all of the knowledge and decision-making resting with one person, another problem is inevitable: what to do upon the czar‘s departure. Many organizations have gone through wrenching transitions after losing their czar, because new systems and controls require significant time and effort to design and implement. As an additional hurdle, the overall approach to pricing may have become so individualized to the czar, it cannot be replicated. The alternative to a pricing czar is to institutionalize pricing strategy.

Institutionalizing a pricing strategy 

Institutionalizing a pricing strategy provides the context and guidelines for day-to-day decisions. This requires comprehensive customer research and tracking, detailed financial analysis, competitive positioning, and a careful tie-in to business objectives. In addition, if the strategy is communicated effectively it will, in and of itself, improve organizational pricing performance.

To ensure the strategy becomes ingrained and that positive results are maximized, it should include a policy outlining the steps to be taken in determining and negotiating prices, the assignment of responsibilities, and a definition of the organization‘s pricing objectives. Measurement mechanisms must then be installed to monitor performance and keep the organization on track.

With these elements in place, an institutionalized pricing strategy can have dramatic impact on the bottom line, much more than the reliance on a pricing czar. The czar may be a good stopgap when an organization is scrambling, but a firm should invest the resources for the long term to build and execute a sound pricing strategy.

Price leader or price follower? Each has its merits.

Price leader or price follower? Each has its merits.

by Michael Hurwich President of SPMG

If the terms ‘cut-throat’, ‘bitter rivalry’, and ‘open warfare’ describe the state of price competition in your industry it is more than likely that several competitors are challenging each other for the role of industry price leader.

The problem, of course, is that in most industries market share competition is a negative-sum game. There can be only one leader, and until that leader is firmly established, price instability and continual downward pressure on industry margins will persist.

For organizations that optimize their role as leaders or followers, profitability can be dramatically improved by understanding the differences between the two stances.

As the name implies, price leadership involves establishing price discipline in the marketplace while followship means optimizing position behind the price leaders.

While the leadership role may sound like a highly desirable position for any firm to occupy, the fact is that attaining price leadership is expensive, and will only be successful if the leader has a perceived superiority for its products or services in the minds of industry buyers.

Perceived superiority can come from many sources, such as a unique brand image, technological advantage, or high levels of customer service.

Regardless of how it is achieved, perceived superiority creates brand loyalty and lowers the price sensitivity of buyers and this is a foundation of price leadership.

In most but not all industries, the price leader is also the market share leader. For example, Procter & Gamble holds both these leadership positions in many of the markets and categories in which it competes.

Note, however, that market share leadership is not necessarily a prerequisite for price leadership. In fact, in some industries, perceived superiority may require a perception of exclusivity, which is incompatible with a high market share.

Leadership strategies

Successful price leaders employ three key devices to protect their leadership status. Firstly, leaders can exercise their clout over industry buyers to raise the industry price ceiling. In raising the ceiling, the price leader can rely on brand loyalty to minimize customer fall-off. Nevertheless, the leader must be prepared to “bite the bullet” and refuse to budge in the wake of protests from buyers, even at the risk of losing a sale.

The second lever at the price leader’s disposal is the ability to demonstrate discipline to competitors who attempt to undercut them in the marketplace. The key here is to ensure that the demonstration is sufficient to convince the errant firm that challenging the leader does not pay.

Not surprisingly, in order to be effective, the demonstration of leadership can also be expensive. The cost to the price leader of temporarily reducing the price of a leading brand over the disciplinary period can exceed fifty percent of the contribution margin.

The final tool available to the price leader is the communication to the industry at large of the commitment to remain in the role of price leader.

Typically, successful price leaders clearly communicate their intention to retaliate vigorously against any competitor who refuses to follow their lead. One of the most effective methods of communicating this commitment is to establish a pattern of consistent behavior, since past behavior is normally used by competitors as an indicator of future actions.

While price leadership may not entirely define the battleground upon which the competition will be fought, it does identify one weapon that is off limits – price.

Price leadership also implies that the price leader will not use price in response to non-price threats to the leader‘s market share. For example, a price leader will not use price to respond to a competitive line extension or to a successful advertising campaign.

A “tit-for-tat” approach is usually established whereby competitive initiatives are met by appropriately related responses.

An alternative approach

Price leadership, if executed properly, can improve long-term profitability, but as stated before, leadership is expensive to achieve and maintain. Clearly, the strengths required to be the price leader are not always available to every company.

For some, a much more profitable alternative is to pursue a price followship strategy.

Where price leadership entails establishing price discipline, price followship involves a willingness to operate within the established boundaries.

The term “followship” may be repellent to those companies with an intensely competitive spirit and a sales-driven culture. Be assured, however, that price followship is not a “roll over and play dead” strategy. Rather, effective price followship involves an intelligent, disciplined commitment to maximize profitability.

·        The successful price follower is guided by these principles:

·        Match but do not undercut the pricing set by the price leader.

·        Refrain from using tactics that encourage the leader to respond with price.

·        Follow and openly support the leader‘s price increases.

·        Ensure that your pricing strategy is clearly understood by the leader and other competitors.

It is interesting to note that although price leadership and price followship are two very different strategies, the most effective action in executing both strategies is to establish a pattern of consistent behavior.

In the case of the price follower, consistent behavior would involve establishing a track record of such moves as matching but never undercutting the leader‘s prices, and never pursuing one of the leader‘s key customers through price.

It would be naïve to think that a company wishing to make the transition from a would-be price leader to a price follower would be able to do so overnight. It is likely that in the short-term other competitors, especially the price leader, will not trust the firm to behave like a follower, particularly if there is a history of bitter competition in the industry.

Moreover, from an organizational culture perspective, the shift to price followship can be a difficult strategy change, particularly in organizations that are traditionally sales-driven.

The payoff, however, of becoming a successful price follower can be enormous. After all, there can only be one price leader in any industry–and only a handful of companies have the resources and the abilities to be the leader.

For other firms, focusing on increased profitability by being a successful price follower surely makes more sense than continually provoking the price leader with vain attempts to overtake it. 

Successful price promotions: What to do to ensure that you get the desired results

Successful price promotions: What to do to ensure that you get the desired results.
By Michael Hurwich President of SPMG

COMPANIES typically use price promotions to attract new customers to products in their introductory and growth stages. In mature markets, price promotions are designed to maintain volume and profitability. Price promotions can be effective at both the distributor and end-user level and can take many forms. Off-invoice trade deals, sampling and trial pricing, co-op advertising, display allowances, consumer rebates, feature pricing and coupons are typical promotional devices. While promotional pricing can be effective in meeting objectives, there is the risk of triggering unwanted customer behavior patterns.

Here are three considerations to keep in mind to ensure your customers respond positively, over the long term.


1. Keep the ceiling up

Customers do not think in terms of “promotional price” versus “regular price”. Instead, they form opinions over time of what is a “good” price and what is a “bad” price. Aggressive promotions cause buyers to expect a lower and lower price to consider it “good”. As a result, companies can expect lower volume at regular prices since customers will increasingly see them as unfair or “bad”. As a result, the price ceiling will fall. In addition, customers generally remember the lowest price they have paid for a product or service with the result that even a limited time special offer can change customer expectations over the long-term.

What to do:
Avoid excessively deep price promotions. If building volume is the objective, use a smaller discount and run the promotion longer or more frequently. While you may not experience the same uplift as a deep discount, you will protect the integrity of your regular prices over the long term.


2. Encourage long-term customer loyalty

Many companies view price promotions as a means to build a perception of brand value. In some cases, however, price promotions merely equate to an attempt to buy customer loyalty. For example, in the telecommunications industry promotions such as cash incentives often encourage customers to switch service providers. While these types of promotions may be effective in building volume, they do little to retain it. They say to the customer, “It is all right to be disloyal and switch for a better price”, resulting in customer “churn”, frequent switching among suppliers. Over time, these promotions encourage customers to base their purchase decision primarily on price rather than the value of the product and/or service, often leading to commodity type prices. In addition, this kind of price promotion can alienate your current, loyal customers who are not privy to this type of exclusionary discount.

What to do:
Substitute price reducing promotional tactics with promotions that incent consumers to purchase for non-monetary rewards. Promotional gifts and frequent “buyer” credit points are examples. These tactics achieve sales oriented goals while taking the focus away from price in the purchase decision, helping to preserve the perception of quality that surrounds a particular brand. If you feel that you must offer a promotion for switching suppliers, provide a similar incentive to current customers to reward them for being loyal and to help retain the newly won customers.


3. Discourage forward and/or delayed buying

Companies that use price promotions frequently, or during specific times of the year, often find that overall volume does not grow as expected. This is usually because of forward and/or delayed buying. Forward buying means that customers stock-up at the promotional price. Delayed buying involves customers waiting to make a purchase in anticipation of a future price promotion. Over the past 10 years, for example, many cosmetics companies have offered attractive bonus packs to customers. One particular company runs its promotion at the same times in the spring and fall each year with the result that over 50% of its sales occur during these two periods. Customers have been trained to delay purchases until the promotional period and stock up on the product when retailers are offering the promotion.


What to do:
Change the timing, frequency, and depth of your price promotions. Inconsistency will help avoid forward and/or delayed buying. There is no doubt that price promotions, when used appropriately, can be powerful tools in building an effective pricing strategy. However, the key to successful long-term profitable use of price promotions is to achieve an optimal frequency of usage that creates significant volume lifts for the product without encountering any major pitfalls.



Promotion pricing can sometimes be hazardous to the overall value of a product in regards to customer perception and behavior towards purchasing. Successful price promotions rely on an understanding of customer conceptualization of value. By ‘keeping the ceiling up’, ‘encouraging long term customer loyalty’ and ‘discouraging forward/delayed business’ companies can begin to ensure the safety of their product-cost when pricing promotions are deployed.