Wednesday, March 29, 2006

pricing: learning from the man who said no to wal-mart

There is an article on Slashdot right now that you should read titled The Man Who Said No to Wal-Mart. It references an article of the same name written by Charles Fishman, who is also the author of The Wal-Mart Effect- How the World's Most Powerful Company Really Works -- And How It's Transforming the American Economy.

Slashdot features a lengthy extract from his article, a small fraction of which I'd like to highlight here:

Selling Snapper lawn mowers at Wal-Mart wasn't just incompatible with Snapper's future -- Wier thought it was hazardous to Snapper's health. Snapper is known in the outdoor-equipment business not for huge volume but for quality, reliability, durability. A well-maintained Snapper lawn mower will last decades; many customers buy the mowers as adults because their fathers used them when they were kids. But Snapper lawn mowers are not cheap, any more than a Viking range is cheap. The value isn't in the price, it's in the performance and the longevity.

You can buy a lawn mower at Wal-Mart for $99.96, and depending on the size and location of the store, there are slightly better models for every additional $20 bill you're willing to put down -- priced at $122, $138, $154, $163, and $188. That's six models of lawn mowers below $200. Mind you, in some Wal-Marts you literally cannot see what you are buying; there are no display models, just lawn mowers in huge cardboard boxes.

The least expensive Snapper lawn mower -- a 19-inch push mower with a 5.5-horsepower engine -- sells for $349.99 at full list price. Even finding it discounted to $299, you can buy two or three lawn mowers at Wal-Mart for the cost of a single Snapper.

If you know nothing about maintaining a mower, Wal-Mart has helped make that ignorance irrelevant: At even $138, the lawn mowers at Wal-Mart are cheap enough to be disposable. Use one for a season, and if you can't start it the next spring (Wal-Mart won't help you out with that), put it at the curb and buy another one. That kind of pricing changes not just the economics at the low end of the lawn-mower market, it changes expectations of customers throughout the market. Why would you buy a walk-behind mower from Snapper that costs $519? What could it possibly have to justify spending $300 or $400 more?

That's the question that motivated Jim Wier to stop doing business with Wal-Mart. Wier is too judicious to describe it this way, but he looked into a future of supplying lawn mowers and snow blowers to Wal-Mart and saw a whirlpool of lower prices, collapsing profitability, offshore manufacturing, and the gradual but irresistible corrosion of the very qualities for which Snapper was known. Jim Wier looked into the future and saw a death spiral.

Deciding "who you want to be" as a company and what your brands truly stand for should advise your pricing and channel strategy - not the other way around. I think this is as applicable for the software space as it is for durable goods - is your channel merely a fulfillment vehicle you offer as a way to drive down your cost-of-sales, a defensive play in response to competitors, or is it something more?

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