Our Take

Musings on the Foodservice Industry

Price Integrity

“Cutting prices or putting things on sale is not sustainable business strategy.”

Howard Schultz, CEO, Starbucks

Many people understand the concept of integrity. As a corporate buzzword and general life stance, integrity is popular. In fact, many people agree about what behavior demonstrates integrity and what behavior does not. It’s generally referred to as shared values. But few of us have such value judgments when it comes to price integrity. When a company cuts its price, or sees a competitor cut their price, is this a “values” issue?

A “brand” defines a product and its market position. There are three generalized levels of quality for food products. For purposes of demonstration, lets call those levels, commodity, better quality and premium. The industry differentiates among the three with label design, marketing support and pricing power. Premium brands command a premium price. Better quality brands demand a mid-market price while commodities sell for a commodity price.

How price levels are created and understood by the buyer, evolve over time, influenced by brand strategies, marketing tactics and the general market conditions of supply, demand and capacity. In the cheese industry, there are a few products with standards of identity, Cheddar and Mozzarella, key among them. Surely there are differences such as 3-yr old and 5-yr old cheddar and analytical specs, but labels do not always communicate such specs. This becomes the function of the position of the brand.

Each cheese manufacturer and distributor positions brands based on their own philosophy and profit motives. Each brand generates its own perception of quality, exclusivity and value.

To increase market share, some manufacturers choose to cut their price. This results in the gain of short-term sales but a loss of brand equity in the end. Price cuts reposition a brand. When a “better quality” cheese is priced at “commodity” level, the brand is repositioned as a value brand; better quality at a commodity price. It is nearly impossible to reposition a brand “up” the quality ladder. Humans tend to understand value much faster than premiums. Once you cut your price, it is very difficult to raise it. This is the essence of price integrity; what does your brand stand for? Will you defend your brand from attack? Do your marketing, price and profitability projections have meaning?

Who cuts your price?

Years ago, I was in a seminar and the question asked to a room of food distributors was, “who manages your gross profit?” One brave distributor answered, “My competition.” Who cuts your price? The decision to cut price is a serious decision that most companies leave to sales representatives. Price is a strategic decision often executed tactically by a sales rep with the goal to gain a sale. However, price and brand integrity are strategic marketing decisions that should not be made by sales reps motivated by a bonus. Sales reps cut price to gain sales and commissions. They are not thinking strategically about market position.

I am not knocking sales reps; I am one. People do what they are incentivized to do. Great sales reps build relationships and business. They oftentimes advocate for their customers, which is exactly what you want them to do. Commissions and bonuses reward sales reps for this behavior.

How does a company maintain price integrity? The simple answer of course is to just say no. The better answer is to sell benefits and value to customers. When the dreaded five words, “Your price is too high” are first heard, great sales reps counter price objections by repositioning the competition. When I heard this statement while managing a premium dessert company, one answer I had was, “If we used margarine rather than butter, I could match that price. Since we believe in the superior flavor of butter, my costs to produce are higher, but our customers really prefer butter.” Rather than reposition my brand and price, I repositioned my competition as inferior quality. This left the prospect with a choice that was non-threatening; they could choose higher or lower quality and still be right. More importantly, I maintained my price integrity. Most prospects preferred butter, so they gave in. First customers test your price, then they test your resolve.

Every company, every brand, every product has specific attributes and performance characteristics that differentiate it from its competition. If you do not build sales and training programs for your staff that anticipate specific price objections from the specific items with which you compete, you will be faced with defending your price integrity everyday.

Two differentiators that come to mind that open discussions on attributes are food safety and packaging. Cheese producers are under great stress to comply with FSMA, SQF, insurance and general documentation requests. The cost to comply and the ease of documentation submission differs by company, size and product mix. Counter price objections by differentiating these costs as value-added benefits.

Packaging is a strategic differentiator. The vast number of options that increase shelf-life or improve merchandising and sales conversion give companies plenty of room to point out differences beyond specs and overages.

Don’t leave yourself vulnerable to these attacks; it is unwise and will result in a win-lose proposition with you and your company on the wrong side of the equation. Counter with well-planned objections as demonstrated above, that create win-win outcomes with customers. You maintain the price and brand integrity and the customer gets a better product then they could from your competitor. If you lose that particular sale, you can return to the battlefield with that customer at a latter date with your brand and price integrity intact.

To maintain price integrity is among the most difficult strategies a company must execute. Failure to do so, might insure your position as a low-price leader. Unless you are also the low-cost producer, your profits will erode over time. Create a system to defend your price integrity; it is an investment that will pay dividends for years to come.

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