Pricing in Retail & CG

advanced seriesFoundation
Preserving margins
and boosting demand
CONSUMER GOODS & RETAIL 4
PROBLEM
DRIVEN
RESEARCH
2013 No. 04
Pricing management
IE FOUNDATION ADVANCED SERIES ON PROBLEM-DRIVEN RESEARCH
foundation

IEFOUNDATIONADVANCEDSERIESONPROBLEM-DRIVENRESEARCH
PRICINGadvanced series
EDITORIAL BOARD
Marco Trombetta
Vice-Dean of Research IE Business School
Manuel Fernández Nuñez
Business Development Director Consumer
Products & Retail Ernst & Young
Margarita Velásquez
General Director IE Foundation
Fabrizio Salvador
Senior Academic Advisor IE Foundation
Alfonso Gadea
Project Director IE Foundation

foundation
Dear friends:
One of IE Business School’s goals is to be an international
center of excellence for research in all areas of
management.We pursue this goal in close collaboration
with the IE Foundation and the recently established IE
University.
I would like to present a new initiative of the IE Foundation
and IE Business School. We hope it will provide an
innovative way to share the results of the joint work of
our scholars and partner organizations.
The initiative,“IE Foundation Advanced Series on Problem Driven Research”,aims to provide
support to organizations facing the new economic structure,featuring unique market rules.
Recognizing the importance of retailing for assessing the current situation and the social
expectations, we have chosen the“Consumer Goods & Retail” series as our maiden work.
The IE Business School seeks to create an environment where we can develop the best talent,
while at the IE Foundation we seek to close the loop between the school and businesses by
fostering sustainable relationships through the organization.
We are confident that this initiative will meet the challenge and offer a new perspective
on the issues.
Marco Trombetta
Vice-dean of Research at IE Business School
Vice-dean Coordination and Research IE University
Greetings

PROFIT
569874 2365 1145566
LOSS
6985 32556 45789 3244
BRANDING
6985 32556 45789 3244
MULTICHANNEL
contents
003 221651 165151
MANAGEMENT
6985 652114 54654
PRICING

Lead researcher
IE Foundation cover letter
Ernst & Young cover letter
Executive Summary
Importance of pricing management
Managing prices in a downturn
2.1 Tactics: Speed is crucial, but so is control
2.2 Products: Selective management of product-level prices
2.3 Strategy: How low can you go?
Multichannel pricing management
3.1 Channel-based price differentiation
3.2 When to differentiate prices
3.3 Price matching
3.4 Open-ended questions
Ernst & Young viewpoint
Acknowledgements
We would like to thank the Consumer Goods & Retail sector professionals who gave up part of their valuable time to help us with this study through
the pricing management surveys.
01
02
03
04

Lead
researcher

Martin Boehm is the Dean of Programs and
Professor of Marketing at IE Business School in
Madrid. He previously served as the Associate
Dean of Undergraduate Studies at IE University
and the Associate Dean of the Master in
Management at IE Business School.
Martin’sintellectualinterestscenteronCustomer
Management.His research provides managerial
implications on how to build profitable and
long-lasting customer relationships.His primary
concern is to quantify the impact of various customer management activities on
a customer’s lifetime value – the net present value of the stream of future profits
expected over a customer’s lifetime. At the same time, he develops analytical
models to estimate or approximate a customer’s lifetime value. As a consultant
he works primarily with firms in the financial services industry to provide them
with a roadmap for growth.
Martinis teachingacrossIE’sMasterinManagement,MBA,ExecutiveMBA,andPhD
programs. Prior to joining the IE Business School faculty, he studied International
Business at Reutlingen University of Applied Sciences and received a Master of
Business Administration from the Australian Graduate School of Entrepreneurship.
He completed his academic education with a Doctorate in Marketing which he
obtained from the Johann Wolfgang Goethe-University in Frankfurt.
Prof. Martin Boehm
Dean of Programs and Professor of Marketing
at IE Business School

Among its primary activities,IE Foundation supports the research and the knowledge sharing endeavors of IE Business
School’s professors. Through its initiatives IE Foundation contributes to the positioning of IE Bvusiness School as
a center of excellence for innovation, and for the creation of knowledge targeted at its productive environment.
The IE Foundation aims to create strong ties and alliances with prestigious,public and private,institutions,particularly
those in the business domain that can help propel our researchers’ initiatives. As an institution that pursues
excellence,research activities are driven by academic rigor and the utilitarian nature seeking to create knowledge.
We aim to push innovation and competitiveness to provide answers to the challenges and needs of society.
This publication is part of the IE Foundation’s collection on Consumer Goods and Retail,developed in collaboration
with Ernst & Young.We would like to extend our gratitude to them for their commitment and their vast experience
on this matter.
The collection has been designed with the purpose of analyzing the key aspects of the industry through a practice-
driven, up to date perspective on key aspects of the industry such as Sustainability, Information Security, Pricing,
and Profit Protection. We are in the midst of a major change in the retail industry. The challenge many Spanish
organizations face,is being at the forefront of such change and benchmarking best practices in the global market.
The IE Foundation looks forward to helping organizations in this process.
We hope that this publication will be of interest to you, and we appreciate your support.
Rafael Puyol
Vice-President,
IE Foundation
Margarita Velásquez
Director General,
IE Foundation
foundation

Consumer Products and Retail companies are developing their business in a much more
complex and volatile environment than they have in the past. In this environment,
companies’ actions focus on transforming their business processes and protecting their
operational margins.
In its commitment to innovation and value creation,Ernst & Young has propelled research
projects on the issues that will help companies deal with today’s industry challenges.
Our research takes into account different actions regarding price dynamics from a brand
differentiation perspective.Secondly,we take on the negative economic effect of shrinkage
with an analytical approach,to identify its root causes and suggest corrective actions for its
mitigation (profit protection).We also seek ways to preserve the information security of an
industry that operates,with an increasing frequency,in mobile scenarios and technologies.
Finally, we propose the adoption of a business commitment perspective, betting on
sustainable initiatives from retailers that take into account manufacturers and consumers.
These four areas are experiencing a large change in process. Ernst & Young and the IE
Foundation are approaching these challenges from an innovative perspective with the
intention of putting them into practice and creating value for the business environment.
José Luis Ruíz Expósito
Partner and Head of Consumer
Goods & Retail
Manuel Fernández
Business Development Director
Consumer Goods & Retail

Executive Summary

Before companies can attempt to improve profit by raising
or lowering prices, they need to know what consumers are
willing to pay. Unfortunately, most executives don’t have
the knowledge to make an informed decision. As a result,
management teams often take the easy road; they resort to
cutting prices.A sudden and prolonged drop in prices changes
customer and competitor behavior. Companies have to act
quickly, even though solid information is hard to come by.
However, pricing decisions made now are likely to affect
consumers’ perceptions for a long time to come.
In a recession,pricing must be managed on three levels:create
a pricing strategy that is aligned with the company’s broader
objectives and positioning, set prices on individual products
and deploy disciplined tactics to manage the aspects of the
transaction that most affect profitability.
As for tactics, successful companies: 1) assess the impact of
pricing moves based on point-of-sale data, and 2) identify
hidden sources of revenue leakage. Discounts offered by
employees in a bid to up market share can lead to hidden
profit leakage. One way for a company to increase its profit is
by managing the“price waterfall,”from list price down to the
transaction pocket price.
Prices should be managed selectively at product level.
Companies should avoid overly aggressive or broad price cuts
when demand is soft. Prices should be adapted for products
that are seeing demand fall. Companies need to identify
demand-sensitive “pockets,” such as customer segments,
product lines or usage.
Prices must be managed strategically. Companies need to
consider where they want their prices to be within three years
and not rely on continual discounts to sustain volumes.Long-
term,continuous discounts hurt the brand.Companies aiming
to set prices strategically must try to anticipate what moves
their competitors will make in the future.
Different segments are willing to pay different prices.
Therefore, price differentiation can be a profitable pricing
strategy. Multichannel pricing has also become a more
widespread strategy among manufacturers and retailers.
Different assessments of channel and price sensitivities can
enable a company to implement channel-based pricing.
Professionals often advocate equal prices across distribution
channels to maintain brand strength. However, the profit
opportunities are too big to ignore.
A range of factors are squeezing business margins, such as decreased consumer spending, increased market transparency via
internet and low-cost competition from emerging industrial powers, like China. Executives must focus on pricing, because
they can no longer rely on sales growth and inflated mark-ups. As companies’ most powerful profit lever, pricing is the most
effective way to boost profits.

1. Importance
of pricing
management
Few times since the end ofWWII has there been such downward price pressure. Part of this pressure is the result
of economic factors (e.g., recession in western economies and Japan), which have dampened consumption.
However, pressure is also stemming from new sources.The sharp increase in purchasing power of retailers like
Wal-Mart or Mercadona places pressure on suppliers. Meanwhile, internet has increased market transparency,
making it easier for shoppers to compare prices. China and other emerging industrial powers are also playing
a big role, as their lower unit labor costs have lowered the prices of manufactured goods. The double cycle-
price whammy has eroded companies’ price-setting power, causing executives to look all around for ways to
maintain margins.
A Global Pricing Study, co-directed by IE Business School, shows that 93% of Spanish companies have faced
increased pricing pressure over the past two years.

Main reasons:
• Customers demand higher discounts (53%)
• Lower-price competitors / new market entrants (50%)
Figure 1: Dramatic increase in pricing pressure
93%
93%
90%
89%
86%
83%
82%
82%
81%
81%
80%
71%
Poland
Spain
France
Belgium
Japan
UK
US
Brazil
China
Italy
Switzerland
Germany
More aggressive customers and competitors. More than 9 out of 10 companies feel increased
pricing pressure.
Source: 2012 Global Pricing Study. Simon-Kucher & Partners, IE Business School, Alimarket

Specifically,our study on Spanish companies in the Consumer Goods & Retail sector shows that the majority are operating
in an industry with falling market prices. 76% of those surveyed said that prices in their industry have fallen in the last
year. 21% even said prices had fallen by more than 10%.
Stiffer competition is one of the key drivers behind the declines in prices in various sectors of the Spanish economy. Most
of those surveyed in our study said they are doing business in an increasingly hostile market environment. Competition
is not focused on margins. Rather, companies are fighting fiercely for volumes and market share.
Figure 3: How would you assess your environment / company?
Figure 2: How have average prices in your sector changed in the last quarter compared
to the year before?
Source: own research
Competitors with aggressive
pricing strategies
++ Price + Price Breakeven + Profit ++ Profit
Competitors focused on
profit maximization
55%
Slight decrease
(between 0% and 10%)
21%
Considerable decrease
21%
Slight increase
3%
Stable

These statistics illustrate the potential impact of optimum pricing on a company’s net revenue.A small shift in prices can
cause a large shift in income. Nevertheless,before attempting to increase profit by raising or lowering prices,companies
need to understand and anticipate how consumers will respond to a change in a product’s price.
It’s too bad that so many companies seem to be unable to appreciate a consumer’s willingness to pay the optimum
prices. When asked if they were “well informed” about six potential factors in pricing, the executives of a leading US
multinational said:
Figure 4: % of well-informed executives about...
84%
81%
75%
61%
34%
21%
Variable costs
Fixed costs
Competitors’ product prices
Value attached to the product
How customers would react to a change
in prices
Willingness of a customer to pay
different price levels
Executives need to focus more on prices now than ever
before. They can no longer count on the double-digit sales
growth and wide margins they had in the 1990s to cope with
a price deficit.What’s more,many companies just can’t lower
operating costs any further. As a result, pricing is one of the
few levers they can still tap to increase revenues.Those just
starting out now should be poised to reap the full benefits
of the recovery when it comes.
Appropriate pricing is the fastest and most effective way to
increase profit.Taking the average income statement of S&P
1500 companies, a 1% increase in prices would result in an
8% increase in operating profit assuming volumes remain
unchanged.The impact is nearly 50% greater than that of a
1% decrease in direct variable costs (e.g.,raw materials,direct
labor) and three times the impact of a 1% increase in volume.
Regrettably,there is also a downside to pricing.A 1% decrease
in average prices has the opposite effect, ceteris paribus,
reducing operating profit by the same 8%. Executives may
hope that lower prices will lead to higher volumes and offset
the lost revenue,but that doesn’t usually happen.Continuing
with our study of typical S&P 1,500 figures, volumes would
have to increase by 18.7% to make up for the impact on profit
of a 5% price reduction. Such a degree of demand elasticity
to decreases in prices is rarely seen. A price-cutting strategy
to raise volumes and, by extension, profits is destined to fail
in any market or industry.

These executives were well informed about
the costs of their products and the prices of
competitors’ products. They were well informed
about the products’ value. However, they did not
know enough about customers’ willingness to pay
or their response to potential changes in prices to
set optimum prices. Experience shows that this
company is not alone.
In the same vein,our research on Spanish companies
indicated that less than half based their pricing
strategies on using the willingness-to-pay function.
The majority (67%) follow a simple cost-base
approach.However,a pricing strategy based on costs
results in either lost profit or out-of-market pricing.
67%
52%
44%
A mark-up on product costs
Relation with competitors’ prices
A function of elasticity or the customer’s
willingness to pay
Figure 5:What pricing approaches does your organization apply to set prices for
clients? (multiple choice)

Similar research shows that executives view price-related issues as a real headache. It appears that prices
cause more headaches or sleepless nights than any other marketing decision.
This report is designed to reduce some of Spanish companies’headaches and more pressing issues.Two issues
that most companies are dealing with are the economic environment and the advent of internet.In the following
pages we offer some tips on how to tackle these two issues.
Question: What is your biggest concern?
Figure 6: Pricing complexity Prices give marketing directors headaches
Prices
Product differentiation
Product quality
New competitors
Distribution
After-sales service
Advertising
4.3
3.8
3.5
3.4
3.0
2.9
2.6
Source:The Strategy and Tactics of Pricing - Pricing and the Bottom Line, Martin Boehm

2. Managing prices
in a recession
Confronted by weakening sales and excess capacity, management teams often resort to cutting prices. It’s easy to
see why. Price cuts are quicker and easier to implement than, say, introducing new products or improving service
levels. Customers often respond immediately to lowered prices. A swift uptick in sales can reinforce executives’
belief that they did the right thing.
But there’s a reason promotional price cuts are sometimes called “management heroin.” Price cuts are addictive.
Customers quickly develop a craving for big discounts and an aversion to full prices. Companies grow accustomed
to the boost in volume and hesitate to raise prices to previous levels for fear that revenues will crater. In a deep
recession, when the first goal is survival, some businesses have no option but to cut prices aggressively. But even
relatively strong companies experiment with heavy discounts and then wake up to find themselves hooked.
Is there an alternative?The truth is,most companies do need to lower prices in a downturn,whether they sell primarily
to businesses or to consumers. Demand is down, yet fixed capacity and costs haven’t changed much. So the laws of
supply and demand exert strong downward pressure on prices. Still, the range of outcomes can vary widely in both
the short term and the long term. What matters most is how effectively companies manage pricing.

Unfortunately, yesterday’s pricing textbook isn’t
much help with today’s conditions. A sharp, prolonged
downturn creates a volatile new environment, altering
the behavior of both customers and competitors.
Companies have to act quickly, even though solid
information is hard to come by. And pricing decisions
made now are likely to affect consumers’perceptions for
a long time to come.Few companies in any industry can
say,“We’ll lower prices today and raise them tomorrow,”
at least not without risking a severe customer backlash.
In our experience, companies that get pricing right
manage it at three levels. They create a pricing
strategy that fully supports their broader objectives
and positioning. They set prices on individual products
to reflect value to both buyer and seller. And they
deploy disciplined tactics to manage the aspects of
the transaction that most affect profitability. A severe
downturn presents challenges on all three levels.Pricing
strategy must address stark differences between the
right short-term answers and the long-term health
of the business. Pricing of individual products need to
reflect dramatic changes in the ways customers make
purchasing decisions.Tactics must be carefully designed
and choreographed to let companies execute quickly
without losing control.
In a normal business environment the best course is
almost always to map out your strategy first,then to set
prices for individual products, and finally to design the
suite of tactics that will allow you to execute profitably.
But in a recession, time is compressed and tactical
decisions take on new importance and urgency.So,we’ll
start there.

Customer behavior,market and competitors’actions can all change quickly
in a downturn. Executives find that previous assumptions are obsolete and
they act faster than ever to adapt.But when companies accelerate tactical pricing
moves without accurate information about the real effects of those moves, they can lose control of the prices
customers actually pay.The most effective companies typically take two steps to avoid this danger:(1) they quickly
assess the impact of pricing moves by gathering lots of fast,fresh point-of-sale data,and,(2) they maximize control
by identifying and managing the hidden sources of revenue leakage. Most companies rely on a host of discounts,
promotions and other pricing tactics to boost sales and earnings. In a downturn, it becomes essential to analyze
which really work and which waste money.
The actions flowing from this kind of analysis not only shore up the bottom line, they also lay the groundwork for
more effective pricing in the future. One specialty retailer, for example, carried fifty thousand SKUs per store –as
much variety as a large supermarket- and relied on promotions to drive a significant portion of sales. When the
retailer put its promotions under the analytic microscope, however, it found that discounts on some items had
virtually no effect on sales. It also discovered that some forms of promotional pricing were far more profitable
than others,even if the costs were similar.Customers loved two-for-the-price-of-one offers,for instance,yet were
less impressed with 50%-off sales.
The retailer also has relearned the importance of seasonality in pricing tactics. Discounting a highly seasonal
product –patio furniture for instance- at the very beginning of the selling season typically attracted a large number
of shoppers looking for bargains.Discounting the same item at any other time of the year was essentially fruitless,
Speed is crucial, but so is control
Tactics
2.1

because shoppers were more willing to pay full price.
After analysis,the store modified or eliminated only
10% of its promotions overall.But that 10% yielded
a boost in profitability of 15% to 20%,while sales
volume declined less than 2%.
The faster you can gather this data and act on
it, the more likely you can stay in touch with
changing customer needs or preferences.
One food-products company, for instance,
built quantitative tools that analyzed
sales data from competitors along with
its own operations every week. Managers
could track the relationship between price
points and volume and spot the gaps between
the company and its competitors. They linked
promotional tactics to sales volume, compared actual to predicted
results, and adjusted their demand models on a weekly basis. In an industry
where monthly sales data and quarterly adjustments were standard,the weekly
data helped the company adapt much faster than competitors to changing
conditions.

Our study of Spanish companies showed that the vast majority (88%) collected data on competitor prices.Both
of the examples above provide clear evidence that companies need more detailed analysis of their promotional
activities. Our study paints a much different picture:
Figure 7: Pricing and promotion practices
We study the impact of price
thresholds and rounding on
customers
We use data-gathering tools
regularly to determine whether
prices are competitive
We use data-gathering tools
regularly to determine perceived
value among customers
We have pre-defined volume/
margin targets for promotions
We estimate the expected return
on promotions through market/
consumer testing
Completely
disagree
Somewhat
disagree
Neither agree,
nor disagree
Somewhat
agree
Completely
agree
Question:Indicate to what extent the following statements apply to your company.

Less then 30% of those surveyed said they measured
the impact of promotions on profit. This suggests
Spanish companies need to hone their price-setting
skills if they want to remain competitive in an
increasingly global market.
A downturn increases the pressure on employees to
chase or protect volume at any price. Freight terms
given by the logistics department, credit terms
authorized by finance, free services and accessories
authorized by customer care agents -all can create
layers of overlapping discounts and hidden leaks that
drain away profits. The faster and more aggressively
you move on pricing tactics, the more important it
is to reassert control.
A European machinery manufacturer did just that,
with remarkable results. Like many producers of
complex products, this company typically realized
net prices that were about 55% of list. But those
discounts came from a wide range of sources. A
product costing €100 might carry several on-invoice
discounts totaling €35. Off-invoice terms or incentives
might be worth another €10. Managers had no way
of identifying why a particular product was selling
for less than list, and had little control over which
people in the organization were authorized to provide
discounts. Front-line salespeople in particular offered
substantial incentives without oversight by senior
management.
To address the issue, the company sent out a
short e-mail survey to its sales force asking about
their discounting and contracting practices. The
survey results, along with input from the finance
department, allowed managers to simulate the
impact of promotional activity and establish
guidelines to maximize return on investment. The
company also built tracking systems to capture off-
invoice trade spending and aggregate the data at
the account level to ensure that the company was
investing in the most valuable accounts. The result
was an increase in earnings before interest and taxes
of nearly 20%.
Maintaining control of pricing execution requires
clear direction to front-line employees about what’s
allowed and disciplined processes to find and
remedy unauthorized behavior. For big-ticket items,
managers need to set clear guidelines for sales scripts
and allowable price ranges.They need to have a well-
developed escalation process for decisions that fall
outside company pricing guidelines.
Managers can also ratchet up discipline by tying
both sales force and channel compensation to price
realization. It’s hard enough maintaining margins
even in the best of circumstances; in a recession
no company can afford uncontrolled discounting
(see section on “price waterfall” for managing
uncontrolled discounts).

advanced series
Many companies don’t get a good grip on the broad
range of factors contributing to final transaction
price. The table below shows price components for a
typical sale by a linoleum asphalt manufacturer to a
distributor.The starting point is the list price. From this,
a discount for order size and a competitive discount are
subtracted, leaving the invoice price.
In most businesses, especially those that sell products
through distributors, the invoice price does not reflect
the real amount of the transaction.There are still several
factors that come into play between the invoice price
and the final cost of the transaction. These include:
discounts for early payment, for volume purchases
and cooperative advertising. When the lost revenue
caused by these specific elements of the transaction
is subtracted from the invoice price, what’s left is the
“pocket price”(or final price):how much revenue is really
left in the company’s pockets after the transaction.The
pocket price, not the invoice price, is the fair measure
of the price attraction in a transaction.
The table below shows the revenue in the price
waterfall from the list price to the invoice price and
to the pocket price, or the pocket price waterfall. Each
element of the price structure represents lost revenue.
A 22.7% decrease from the invoice price to the pocket
price is not out of the ordinary. Studies show an average
decline between the invoice and pocket price of 17%
for packaged consumer goods companies, of 18% for
chemicals companies, 19% for IT companies, 20% for
footwear companies and 22% for car makers.
Companies that do not manage the entire price
waterfall actively and, as a result, suffer from multiple
and highly volatile revenue leaks, miss out on any
opportunity to achieve better pricing.
Figure 8: Each element in the price waterfall represents a revenue leak
(euros per m2
)
22.7%
off-invoice
The price waterfall
6.00€
Manu-
facturer’s
list price
6.00
Order
discount
0.12
Competitive
discount
5.78€
Invoice
price
0.30
Discount
for
payment
terms
0.37
Volume
rebate 0.35
Off-
invoice
promo-
tions
0.20
Cooperative
advertising
0.09
Freight
4.47€
Pocket
price
PRICING

Pocket price band: At any given point in time, the
pocket price of an article is not the same for all
customers. Rather, articles are sold within a range
of prices. This range, for a unit volume of a specific
product, is called the pocket price band.The following
chart shows an asphalt manufacturer’s pocket price
band for a single product. There is a 35% difference
between the highest and lowest priced transactions.
This pocket price band may seem wide,but much wider
bands are commonplace.
Understanding the variation in pocket price bands
is essential for a company to exploit the best pricing
opportunities of a transaction. Executives that can
identify a broad pocket price band and the underlying
causes can manage the band better in the company’s
favor. When prices fluctuate in a range of more
than 35%, one could easily assume that appropriate
management could improve the price by several
percentage points, benefiting the company.
Figure 9: Elements of opportunity to benefit from a pocket price band
(percentage of volume)
Pocket prices (€ per m²)
5.80€ 5.005.40 4.60 4.005.60 4.80 4.205.20 4.40 3.80
2.7
5.0
10.7
6.6
13.4 13.1
14.2
10.1
15.0
6.1
3.1
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PRICING

Productos
2.2
Selective management of product-level prices
Falling demand in turbulent times triggers
a cascade of list-price declines and deep
discounts off list. Yet many companies
lower prices too aggressively or too
broadly because they fail to answer two
key questions: Why is demand falling? and
where is it falling most? Answering these
questions requires managers to get inside
their customers’ heads.
In a downturn, some consumers and
businesses cut back because they just
don’t have the money to spend. Many more
prospective customers have the money but
feel uncertain about the future.Both factors
show up in the price declines that hit the
transportation sector, for example, where
average prices fell roughly 13% in the first
few months of 2009.So,which factor should
get the greatest attention?
Spooked consumers won’t buy more until
they feel that it is safe to do so, or until
they decide that prices have dropped as
far as they’re going to. A company needs
to understand its customers well enough
to know which of these factors is more
important. If your customers can afford to
buy but are nervous about doing so,lowering
prices may not be the right way to help them
overcome inertia. Rather, companies can
find ways-by combining pricing with other
marketing efforts-to send the message that
buying is a low-risk decision.
Take cars, for example. Plummeting
employment doubtless contributed to the
sharp drop in auto sales in 2008 and early
2009. But fear of job loss probably kept
many more potential buyers out of dealer
showrooms. Cars are a big-ticket item, and
most customers can delay purchases by a
year or two.
In response, auto companies typically
slash prices in a downturn. Most of the big
players, desperate for sales, did it this time
around. But Hyundai took a different tack.

Recognizing that its customers weren’t likely
to respond to the usual rebates or incentives,
the Korean car maker announced a plan that
would allow customers who lost their jobs to
return a new car. The reasoning: A fully employed
customer can afford the full-price car nearly as easily
as the discounted car. But a customer fearing layoffs is
more likely to hold off on big purchases.The strategy is powerful
because it addresses what goes on inside a customer’s head,not
what goes on in an economics textbook. It carries some risks,
but it is not as risky as watching sales plummet-and indeed,
Hyundai’s sales were up nearly 5% in the first several weeks
of 2009, compared with the same period in 2008. Overall auto
sales, meanwhile, had dropped 40%.
Rather than relying on highly visible across-the-board discounting,sophisticated pricers find ways to lower
average prices in highly selective ways.Almost every company’s business contains“pockets”of real variance in
demand- customer segments,geographies,product lines,occasions of use,and so on.In our experience,most
companies underestimate how many of these pockets can be addressed effectively through targeted pricing.
Faced with a big fourth-quarter sales drop,for instance,L’Oréal recently decided to lure customers with a 20-
ml“petite”bottle of one expensive perfume,pricing it at $55,compared with $175 for the traditional 100-ml
size.The move gave customers a size they could more easily afford but actually created a 57% price hike per
milliliter-$2.75/ml versus $1.75/ml.

Large companies with thousands of products face a significant challenge in
pricing appropriately for a downturn.But it’s often possible to apply new pricing
rules to categories of products. One European manufacturer of construction-
related products, for example, had tens of thousands of SKUs. To simplify
pricing, it grouped the products into three“buckets.”Bucket #1 included
products that were highly differentiated and that customers valued
highly. Bucket #3 included commodity-like products over which the
manufacturer had little pricing power. In the middle was bucket #2.
The company applied cost-plus pricing rules to each bucket, but
the“plus”was higher for the buckets with more differentiated
or more highly valued products.To gather the necessary data,
the company relied partly on internal statistics and partly
on its managers, who gathered at workshops to run
through lists of products,quickly putting them into one
bucket or another.This approach to variable product
pricing helped the manufacturer raise its earnings
roughly 20%.
A company’s options during an acute downturn
are determined by its strategic and financial
position. A small number of businesses
occupy strong positions on both of
these dimensions and have truly
differentiated products or services,
which enables them to maintain
price levels.
Even then, these companies work hard to deliver
higher value for the same price. That can be as costly as
cutting prices in the short term, but it preserves pricing integrity
for the long term.When Amazon launched the Kindle at $399 in November
2007 (just before the start of the recession), many analysts thought customers
would balk at the price, especially since the Sony Reader was available for $100 less.
Instead, the Kindle sold out. The Kindle 2, launched in February 2009 for $359, continued
to exceed sales expectations.

Research carried out years ago showed that a hosiery
retailer elicited an “enormous” positive response in
sales by raising its price from US$1 to US$1.14. Appa-
rently, consumers felt the higher price was a sign of
a “higher quality”. Such anecdotal evidence of viola-
tions of downward sloping demand curves had been
observed previously, but dismissed as anomalous.
Yet, evidence continued to mount that price might
have attractive as well as aversive properties. In the
economics-oriented literature,as well as in the emer-
ging empirical tradition in marketing and consumer
behavior,it was becoming increasingly apparent that
consumers frequently employed price as a proxy for
product quality. By the end of the 1908s, based on an
integrative review of over 40 empirical studies, the
evidence for a robust (though moderate) price-percei-
ved quality effect appeared to be incontrovertible.
The theoretical basis for this perception, that higher
prices were associated with higher quality, was less
clear however, since the correlation between price
and “objective” or actual product quality seemed to
be relatively low. Occasionally higher priced options
were found to be of lower objective quality than low-
priced alternatives in the same category. The prevai-
ling wisdom at the time regarding positive price-
perceived quality correlations relied on a cognitive
miser argument. Evaluating more direct (intrinsic)
information about quality across a bewildering array
of products, each with its own unique set of quality
connoting attributes was cognitively daunting, so
most consumers adopted a price-quality heuristic
because it had worked reasonably well in the past.
That is, consumers consciously chose to rely on the
price cut to make quality judgments, because such a
process was cognitively efficient.
Therefore,consumers infer low quality from constant
discounts or low prices. In the long run, constant dis-
counts can damage the brand.
How low can you go?
While most companies cannot easily hold the line on prices this way, it’s
a mistake to lower prices without considering the strategic implications.
We must ask ourselves: Where should our prices be in three years? How will
short-term actions help us or hurt us on the way to that objective? Aggressive,
highly visible discounts, for instance, may cheapen a brand in customers’ minds. It
may persuade customers that they paid inflated prices in the past. Slashing prices also
makes it hard to raise prices when conditions improve.
The price/quality relationship:
How lower prices hurt brands
Strategy
2.3

Making the right strategic decisions about pricing can often amount to a chess match. You
must consider the whole board and plan several moves in advance.
Understanding the market positions of competitors and profit pools in the industry is crucial.
But a static view of competitors doesn’t help; you need to anticipate their future actions
based on their share of key segments,relative cost position,capacity utilization,and financial
health.Your industry structure also plays a key role in determining the pricing strategy that
will ultimately maximize your profits.What can you do that your competitors will be unwilling
or unable to copy? As we noted earlier,markets are not monolithic,and there will be pockets
of opportunity created by high share in one segment or low-cost position in another that
allow companies to target the most effective pricing moves. At the same time, companies
must be careful not to destroy the profit pool in their industry.
Consider the case of a company operating in an industry with high fixed costs and weak
competitors.By cutting prices too much,it might risk initiating a price war that is destructive
for everyone. One large real estate owner, for example, determined that, while it certainly
didn’t want to lose share in a down market, it also didn’t want to gain more than a point
or two.Why? Because any scenario in which it gained significant share in the face of falling
overall demand would drive competitors to lower prices so much that its own lease rates
and profits would plummet.
Pricing strategy decisions can amount to a
chess match: we must plan several moves
in advance and anticipate what moves the
competition will make.

advanced series
Our survey of leading manufacturers and retailers in
Spain shows that most companies (60%) believe they
are in a price war.
Price wars have racked industry after industry in recent
years. All too often, there are no winners. No industry is
safe. No company, however well run, is immune. After
all, most price wars start by accident, through some
apparently trivial misreading or misjudgment of market
conditions. Rare is the price war that is initiated as a
deliberate competitive tactic.
In the current market,price cuts are driven by a structural
situation of demand,although in many cases companies
are still looking more at what competitors are doing
when establishing prices than at the new price/value
relationship demanded by the customer.As a result, the
harmful effects of the price war may continue to exist.
In sectors like Consumer Goods & Retail,this situation is
especially acute because of their unique characteristics
and strategic importance. The best way to deal with
price wars is to avoid them altogether and, if this is not
possible, get out of them as quickly as possible.
Pressure on prices:
A problem in Spain?
PRICING

In fact, our survey of leading Consumer Goods
& Retail companies showed that most of them
believe the price war was started by a competitor.
This is debatable, since most considered
themselves to be the price leader.
Reckless pricing measures and a strict focus on
volume are two of the main causes of price wars.
There is widespread lack of knowledge of how
much volumes need to increase to make up for
the price cut and an obsession to win market
share, creating a vicious circle of price declines.
Why should we avoid a price war?
Numerous studies show that unless a company has a cost advantage of around 30% over another company,
competing for the lower price is a suicide tactic. Price reductions are almost always copied immediately.
Profits are extremely sensitive even the slightest declines in price levels. Price is the most sensitive lever in business.
A real example can be found in S&P 1000 companies. A one percentage-point decline in price can lead to a 12%
reduction in profit. Suppose a price war causes a 5% decline in price. Given the marginal contribution of 30% (for
the S&P 1000), that means that volume would have to increase by 20% for a company just to break even.This price
elasticity of 4 to 1 does not happen in the real world (a 2 to 1 elasticity is found if we’re lucky).
Causes for unwarranted pricing:
Complicated statistical or mathematical models are not required to analyze the causes of poorly informed price
formation due to the effects of a price war in the traditional sense. Most times, companies get caught up in them
because of misreads or misjudgments of competitor actions and market changes.They are rarely started deliberately.
Studying the misjudgments, we see that what is really happening in the market is the following: a company cuts
prices without disclosing important collateral information (period of the cut and special circumstances) and the
response by the competitor is to also lower prices. And so the price war begins and escalates. Competitor A identifies
competitor B as the one who started the war and vice-versa.
Is you company currently engaged in a price war?
40%
No, we are not
in a price war
52%
Yes, it was started
by a competitor
8%
Yes, we
started it

advanced series
The study conducted by IE Business School showed that 35% of Spanish executives admitted that they are incapable of determining
the right volume growth necessary to offset a 5% decrease in price.The remaining 65% that believe they know the right answer
could be wrong 80% of the time.
The IE Business School Global Pricing Study 2011 revealed a close relationship between a corporate focus on volume and price
wars. Markets characterized by the large percentage of companies focused on volume rather than profit are more likely to
suffer as a result of a price war. Price wars are, therefore, caused not only by external and uncontrollable factors, but also often
because of wrong strategic decisions.
Regarding misjudgments, it is a common belief among company managers that only the lowest-price supplier in a market can
ignite a price war.They are mistaken:The culprit can easily be the highest-priced supplier.Consumers do not simply only buy on
price; they buy on value (V=Benefit-Price). As a result, a premium competitor can start a chain reaction, triggering a downward
spiral in the industry.
PRICING
There is a correlation between the focus of a business on sales
volumes and price wars.
However: for Spanish (and Italian) companies, it seems that volume-orientation
is not the only explanation for price wars.
Relationship between the focus on volume and price wars.
Source: 2011 Global Pricing Strategy. Simon-Kucher & Partners, IE Business School, Alimarket
Pricewars
Focus on sales
volume
Many
High
Few
Low

How to avoid price wars
Some industries run an inherently higher risk than others. Economic
theory and our own empirical evidence indicate that when there is a
large concentration of big customers in a market, there is greater pres-
sure on competitors.
Seven steps have been identified to help avoid a price war:
a. Avoid strategies that force competitors to respond with lower prices.
Reactions by competitors, coupled with a lack of knowledge or mis-
judgments, encourage other companies to react incorrectly or over-
react. If you want to gain share, do so gradually.
b. Avoid all possible misreads.Interpreting market movements is essen-
tial.Invest in understanding the competitors’prices to avoid reacting
before understanding the reason behind the price cuts and whether
the cuts are proportionate to the consumer’s demand based on price
/ value.
c. Avoid over-reaction as a general rule of thumb.One reason price wars
are more prevalent now than in the past is that managers view a price
reduction as quick and quickly reversible,when the truth is otherwise.
d. Play your value map right.This is another key aspect that is not usually
studied correctly.By studying the sensitivity of customers and compe-
titors’cost structure,the best price can be established.The best price
is the highest price the market is willing to bear.
e. Communicate your price effectively.This is another key issue,as men-
tioned previously, to prevent misreads. If we have to cut prices, it is
crucial to communicate all the reasons behind it to avoid misinter-
pretations that result in price wars.
f. Jawbone on pricing. In line with the communication mentioned pre-
viously, it is important to influence and explain fully the importance
and implications of pricing.It helps to speak openly about the horrors
of price competition.
g. Exploit market niches.While this seems obvious,greater efforts need
to be concentrated on exploiting market niches before opting to focus
on price as the sole driver of an increase in sales volume.

3. Multichannel
pricing
management
The website of computer manufacturer Dells asks prospective buyers to declare whether they are a home user,
small business, large business or government entity.Two years ago, the price of a 512 MB memory module (part
number A0193405) depended on which business segment one declared. At the time, Dell quoted $289.99 for a
large business, $266.21 for a government agency, $275.49 for a home, and $246.49 for a small business.
What explains these price differences? How does Dell benefit from it? Different segments have different
willingness to pay. Dell optimizes its prices, offering lowering prices to relatively price-sensitive segments. An
interesting aspect of Dell’s attempt to charge different prices to different customers is that the customers aid
Dell in its effort. According to a Dell spokesperson, each segment independently sets prices and the customer
is free to buy from whichever is cheapest.
This example illustrates that the value is in the mind of the person who values it and different minds value a
product differently.To capture this opportunity, companies will discriminate market prices. Price discrimination
is a strategy of charging different prices to different customer segments for the same or similar products. In
any market, different customers value products differently and, therefore, are willing to pay different amounts
for the product.
The automobile industry has capitalized on these differences in a very effective manner. Each manufacturer
offers a wide variety of models to cater to the preferences of different buyers: from subcompacts to compacts,
full-size sedans, SUVs, and sporty cars. Within each category, they also provide numerous options to make the
offerings more suited to multiple buyers, who may then pick and choose the options they desire.
Similaly, many consumers pay higher prices for electronics items, knowing very well that they will come down
significantly over time. And, stores like Gap and Old Navy routinely mark down merchandise after a relatively
short time following the introduction of new items; once again, however, many consumers do not hesitate to
pay full price.
Economic and marketing literature have long recognized that price discrimination can be a profitable pricing
strategy. In a market where preferences are mixed and products are viewed differently, companies can boost
profits by segmenting consumers and setting different prices, enabling them to extract more from consumers.
Empirical research indicates that profit can be as much as 34% higher when companies use price discrimination
than when they employ a uniform pricing strategy.

Figure 10: Does your company employ price discrimination? (Multiple choice)
We offer different brands at different prices
Prices vary depending on the channel
We offer individual and bundled products
We offer discounts to certain customer
segments
Different prices are offered to customers
depending on the geographic area
We do not engage in price discrimination
There are volume discounts
We offer different prices to customers
depending on the date
10% 20% 30% 40% 50% 60%
In our survey of Consumer Goods & Retail companies,the outcome was that the majority used price discrimination
among brands. Many also offered bundles with different prices and discriminated prices based on the channel
and customer segment.
Among the various types of price differentiation, researchers and professionals have looked particularly at
self-selection given its numerous advantages, including low cost and easy application, not to mention its high
profitability.In price discrimination by self-selection,a company offers different versions of a product and different
prices and allows consumers to choose the one that best suits their preferences.

The increasing popularity of internet has prompted many traditional retailers to become multi-channel retailers offering
consumers the choice between online and offline channels. More and more, Companies are using sales channels without
physical stores to increase or complement current processes for delivering products and services.As multi-channel retailing
gradually takes over, customers are faced with a wide range of purchasing and communication options. As a result, it is
becoming more commonplace for customers to use multiple channels to interact with the company.
A study by DoubleClick found that 65% of consumers were multi-channel consumers.Similar research by Forrester Research
indicated that more than two-thirds of consumers search for products online, but purchase offline.

Is it a good idea to offer multiple channels?
Consumers increasingly like to see products online
before setting foot in the store.Going first to internet,
they frequently choose what they want before going
to the store. However, once they are in the physical
store, they usually end up buying some other item.
After initial worries that the internet would steal
sales from stores, retailers now are realizing that
just the opposite is happening. Customers who
“window shop”online are much likelier to spend more
overall than those who just go to the store. A study
by Forrester Research recently found that customers
who shop three different ways –in stores, on Web
sites and with catalogs- spend about four times more
than customers who shop only through one of those
channels.Similarly,customers who shop two different
ways spend two to three times more than the single-
channel customer.
To take advantage of this behavior, major retailers
are looking for new ways to steer shoppers from one
channel to another. J.C. Penney, for instance, says it
posts weekly circulars online for customers to use in
the store. It also offers a broader selection of certain
items, like small appliances, in catalogs to encourage
people to shop multiple ways.Penney says the number
of customers using all three shopping mediums grew
30% last year, while the number using at least two
jumped 46%.
A recent study by consulting firm J.C.Williams Group
showed that J.C.Penney customers who shop just one
way spend,on average,$150 a year on its internet site,
$195 in its stores and $201 with the catalog.But Penney
customers who shop all three ways spent $887 a year.
“Any time a customer comes into the store because
of the catalog or Internet, there is a high incidence of
that customer buying something in the store,” says
John Irvin, a Penney executive vice president.“This is
the fastest growing change in customer behavior.”
The relationship between the use of the channel and
profitability is not restricted to the retail sector.A study
led by IE Business School on the European financial
sector produced several interesting conclusions. The
results showed that multi-channel customers are far
more profitable than single-channel customers. The
research also showed different levels of profitability
between customers using two channels and those
using three. The results suggest customers should
be encouraged to use two channels, but not three, to
interact with the company.

Given the vast differences between online and offline channels,such as convenience,risk or transparency,
customer preferences are mixed regarding the channel,resulting in different perceptions of the channel
and price sensitivities. As a result, operating in multiple distribution channels provides an opportunity
to apply price discrimination based on channel, whereby the companies can set different prices for the
same product offered on the online and offline channel and customers can self-select their preferred
channel-price combination.
Next,we look at whether multi-channel retailers set different prices of the same product between online
and offline channels and determine the scale of the price differentials (gaps).We also analyze the factors
influencing a company’s decision to engage in channel-based price differentiation, their extent and
management (above all the influence of market,retailer and product factors).
Consumers use different retail channels in different ways and,
therefore,their perception of the channel varies.Studies show that a
buyers’willingness to pay for a product through offline channels can
be 8% to 22% higher than through an online channel.Similarly,studies
suggest consumers have a different perception of price between online
and offline channels.Therefore, price differentiation based on the channel is
feasible.This, coupled with evidence that price discrimination boosts profits, should
spur companies to following a price discrimination strategy whenever they can.
However, industry professionals argue that in order to maintain a strong brand, the company offer
has to be consistent across channels. Varying prices may lead to customer confusion, anger, irritation
and a perception of price unfairness. Since previous research has shown that unfair price perceptions
decrease purchase intentions, practitioners advocate channel price integrity.
Channel-
based price
differentiation
3.1

Empiricalstudiesin theUSproducedsimilarresults.
It appears that stillonlyaminorityofmulti-channel
retailers engage in price discrimination based on
channel, the extent and management of which
vary from retailer to retailer,and product category
to product category. According to a study of over
a thousand products, different prices were set for
approximately 20% of the products. For products
with different prices, in around 70% of the cases
the offline price was higher. The highest positive
price gaps can be found in consumer electronics,
such as remote controls and memory devices.
The analysis shows that 29.63% of retailers engage
in price discrimination based on channel.Of these,
18.75% charged higher prices in the offline channel,
6.25% always charged higher prices in the online
channel,and the remaining 75% followed a mixed
strategy,charging higher prices in either the online
or offline channel depending on the product. In
summary, we found that retailers in fact engage
in price discrimination.
Figure 11:If there were a direct channel,would you vary prices between
channels?
We haven’t studied it
We would use
the same price
There would be a
difference between 1%
and 10%
28%
52%
20%
This is shown in our study of the Spanish market. The vast majority of Spanish companies do not engage
in price discrimination by channel. Rather, they charge the same price in direct and indirect channels. Only
20% of Spanish companies set prices with a difference of up to 10% between channels.

It is also interesting to understand the factors determining
the extent of channel-based price differentiation. Studies
show that the level of online competition has a significant
negative influence on the occurrence and extent of
channel-based price discrimination.The higher the online
competition, the lower the probability of a multi-channel
retailer engaging in channel-based price differentiation and
the size of the price gap between channels.
Further, the number of distribution channels that multi-channel retailers
operate has a negative influence on the extent of channel-based price differentiation, implying that
the higher the number of distribution channels, the lower the probability of price discrimination
given the complexity of coordinating the channels.
More interesting still is that results show that product type influences the extent of price
differentiation. The extent of channel-based price differentiation is highest in the case of
services, which are less vulnerable to cannibalization due to resale. Among products, we
also see a greater extent of channel-based price discrimination in the case of perishable
goods (food) than durables (appliances), lending further indication that retailers
are less involved in price discrimination for products that are suitable
for resale. These results could also explain the large group
of retailers that follow a mixed price discrimination
strategy adapted to the variety of products offered.
The results show that many multi-channel
retailers engage in channel-based price
differentiation and a certain increase in this
trend over time. Nevertheless, retailers still
apply consistent prices for the majority of
their products. Generally speaking, the 12-
16% price differential for products between the
online and offline channels reflects the differences
in consumers’ perception of the channel, although
this is relatively low compared to other types of price
discrimination. Overall, results show there is channel-based
price differentiation, but that the impact among retailers is still relatively limited.
When to
differentiate prices
3.2
?

The number of
distribution channels that
multi-channel retailers
operate has a negative
influence on the extent of
the channel-based price
differentiation.
The higher the level of online
competition, the lower the
probability that a multi-channel
retailer will engage in channel-
based price differentiation.
The extent of
channel-based price
differentiation is highest
in the case of services,
which are less vulnerable
to cannibalization due to
resale.

The analysis shows that not all companies
have the same motivation to engage in price
discrimination.The results of studies on the factors
behind the existence and extent of retail channel
price discrimination suggest that retailers act in
accordance with standard microeconomic theory:
for instance, higher levels of online competition
make retailers less motivated to engage in
channel-based price differentiation. At the same
time, the burden of coordinating effective multi-
channel price discrimination still hinders some
retailers from capturing the full opportunities
that price discrimination strategy can afford.
Although the level of price discrimination achieves
the expectations of the microeconomic standard
in some product categories (e.g., higher price
differentiation for services and perishable goods),
the differences in the nature of the products have
not been fully explored yet.
Going further,we see that multi-channel retailers
charge on average higher prices in the offline
channel. This practice is probably driven by the
higher perceived risk of the relatively new online
channel and/or the motivation of the company to
steer consumers to the less costly online channel.
Moreover,retailers may pursue different operating
targets for the online and offline channels and
use the offline channel to enhance their visibility.
However, there are always exceptions to the rule.
Online prices are normally higher than offline
prices in the food sector. There are basically two
reasons for this phenomenon: online food stores
offer a high degree of convenience, saving the
customer from having to make their weekly trip
to the supermarket and instead delivering the
products to their doorstep. We have also found
that online food shoppers are typically consumers
who have little time to shop and, therefore, are
more willing to pay a premium price for a delivery
service that saves them time.This example shows
that the customer’s price sensitivity is the main
trigger of channel-based price differentiation.

The results also show companies
not only use internet as an addi-
tional channel, but rather they
can explore this channel further,
engaging in channel-based price
differentiation.Nevertheless,since
a low online reach helps separate
markets and encourages channel-
based price differentiation, the
growing popularity of the internet
as a place to shop reduces the op-
portunities to use this channel for
price discrimination. In any event,
as online channels become more
popular, companies could reduce
their number of physical stores.
With a lower offline reach, they
can still engage in channel-based
price differentiation.

Promising to match competitors’ online prices is becoming the trendiest shopping tactic for four big-
box chains, but retailing experts say the plans may backfire and send more shoppers scurrying to the
Internet. A few weeks ago, electronics giant BestBuy and discounter Target said that for the first time
they would match the prices offered by the online sites of some rivals, including Wal-Mart and Amazon.
The brick-and-mortar chains are trying to combat“showrooming”by shoppers who check out products in
stores but buy them on competitors’websites, often at lower prices. Both retailers’price-match policies
include significant caveats that could wind up confusing and angering customers,retail experts warned.
Not only do shoppers have to ask for price cuts, they also may have to prove the existence of a lower
price to harried store workers.
The stores say they are confident the new efforts will pay off. Best Buy said it has done at least one pilot
of its price-matching program in a major market and was pleased with the results. Best Buy will match
prices on electronics and appliances –but not other products- from 20 different online rivals. It excluded
third-party sellers like those on Amazon, where prices are the most volatile. Best Buy said its staff must
verify on a store computer that the rival’s price is actually lower at that moment and that the product
is readily available. And a salesperson or manager can refuse to match a price if they deem it too low.
The key to resisting
Price matching
3.3

Another risk that retailers run is encouraging even more
shoppers to check the internet to compare prices, a
comparison that doesn’t favor the big box stores.A recent
survey by William Blair found that on average Target’s
prices were about 14% higher than Amazon’s, Best Buy’s
were 16% higher and Wal-Mart’s prices were 9% higher.
The comparison included shipping costs for Amazon, but
not sales taxes. And a salesperson or manager can refuse
to match a price if they deem it too low.

If manufacturers begin engaging directly with consumers, most
likely they will rely less on intermediaries for information on
consumers and potential customers. They could even start doing what
intermediaries did before, thereby introducing new price trends in the system. These changes
would shape the dependence structure of their relationships with the channel. Similarly, the
dependence relationships will not depend again on a single intermediary to act as a channel.
Companies with indirect channels that implement multi-channel marketing will need to minimize
the potential for the channel’s dysfunctional conflict. Any direct sales by the company to the end
customer can be perceived as an attempt to circumvent the intermediaries. However, from the
business standpoint, direct contact with customers can help them identify potential customers
and leverage up-selling and cross-selling opportunities.
Companies like HP, which have a large number of distributors marketing their products and
services, are faced with this situation. Although HP has taken a number of actions to mitigate
the potential conflicts with the channel –e.g., the prices on its website are higher than those
offered by its intermediaries- a conflict with the channel can arise, resulting in decreased sales
support by the distributors. The question is still how to strike a balance between reaching the
end customer and not offending partners in the channel.
Open-ended
questions
3.4
?

Has spent his career in the areas of commercial and
customer strategy in several sectors, including Consumer
Goods & Retail, where he was a pioneer in the use of
real time models for smart customers. Has recently
focused strategy development in Social Media & Digital
Transformation.
He began working at The Boston Consulting Group before
joining BNP Paribas group as Marketing Manager. He is
Associate professor at Universidad Carlos III in Madrid and
ESIC and writer of articles for specialist journals.
Has a bachelor’s degree in statistical sciences and techniques from Universidad Carlos III of
Madrid and an MBA from London School of Economics
Pablo González Muñoz
Partner Ernst & Young - Advisory Services

4. Ernst &Young
viewpoint
TheneedsandexpectationsofcustomersandconsumersinSpainareset tochangedramaticallyforanumberofreasons:1)
the country’s economic outlook,with flagging activity and rampant unemployment,new social trends shaped by stagnant
disposable income and more time dedicated to work –which naturally implies an increase in online time-;2) demographic
changes, whereby purchase decisions will be made by people from the 1970s and 1980s generation -with more individual
profiles and greater demands for personalization-;3) continuous proliferation of new digital technologies,resulting in new
capacities to share information and compare the value of products; and 4) an exponential loss of “confidence” in mass
advertising.
These new needs and expectations will lead consumers to demand individually tailored products and services that offer
“greater guarantees of trust”in the products and services they purchase and to reject surprises.
Companieswillneed topersonalizepricemanagement bygeographicenvironment andcustomer typeandset pricesbased
on product category,the impact of loyalty programs and the role of promotion through different channels.All of this must
come alongside easier and more transparent communication and promotional mechanics for the customer,with simplicity
becoming a key future driver.
This heralds a new era shaped by the personalization-simplicity puzzle,prompting companies to:
• Continueadvancingon thedevelopment ofpricesegmentationskillsbasedongeographicarea,competition,product type,
customer type,and channel mix.
• Anticipate the impact of price strategies and tactics by developing engines that simulate their impact on the income
statement.
• Exert greater analytical control in implementing the stated policies to prevent distortions in execution.
• Optimize the value chain to prevent operational inefficiencies from being transmitted to the customer via price.
All of this is dealt with in this study,which is geared towards practices on which some sector players sector and customers
we have been working are already working.

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to further their educational, research and
management activities.
Priority is given to the training and cultural
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Ernst & Young is a global leader in
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services. Worldwide, our 167.000 people
are united by our shared values and an
unwavering commitment to quality. we
make a difference by helping our people,our
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their potential.
Ernst & Young refers to the global
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