German lesson in perils of price cuts

TIM BOREHAM
July 29, 2013
The Australian

VISITING German pricing expert Frank Bilstein has a salutary warning for local supermarkets, utilities and insurers that indulge in price wars: condition customers to expect a discount at your peril.

The A.T. Kearney partner has witnessed the perils of rampant discounting in his home retail market, which he laments has become a Euro dumping ground for poor-quality goods.

“It’s like toothpaste: once it’s out of the tube there’s no way of getting it back,” he warned. “Once you have trained people (to expect discounts) there’s no turning back.”

Mr Bilstein, who is reviewing the consulting firm’s pricing range, said “very aggressive” pricing in the insurance and electricity sectors might look good for customers, but “at some point it becomes a disservice to both the consumer base and the companies involved”.

In the case of the US telco sector, low data pricing increased smartphone usage to the point where network reliability in some areas became “abysmal”. “Yes you pay less, but the quality just sucks because you have over-usage on a grand scale.”

However, Mr Bilstein says the Coles-Woolworths supermarkets war — marked by private-label brands and $1 milk — was “blissful peace” compared with Germany, where even downmarket US giant Wal Mart found the going too tough and withdrew.

“All the chains drop their trash into Germany; it’s hard to get good quality groceries,” he said. “Overall quality has been destroyed by price competition.”
Mr Bilstein said the level of corporate rigour applied to cost cutting and operational improvement was “vastly better” than that applied to pricing.

“Pricing doesn’t lend itself to the same rigour so easily,” he said. “The knee-jerk reaction we get . . . is even if it makes perfect economic sense to put up prices, the perceived risk is over-estimated.”

He says the struggling newspaper industry should be bold enough to increase subscription prices, because the remaining readers of high-brow publications may not be as price-sensitive as feared.

“There will be a segment of readers willing to pay $4 to $6 a day. After all, that’s what they pay for a cup of coffee.”

Mr Bilstein said he was “amazed” at how little customers knew about pricing, citing one global study that found only half of shoppers knew within a 10-20 per cent range the price of the goods they had just put in their trolley. “We are hardwired to love X per cent off, regardless of whether the starting point was inflated in the first place,” he said.

Because no one knew how much they should pay for rarely bought items such as a shovel or a lock, hardware chains cleverly position their price ranges so that “suddenly people are willing to pay $10 for a shovel rather than $5”.