Price reductions: What a concept

Discussing a category's performance last week, an executive mentioned the pressure that rising oil prices had placed on the category's profitability over the past year. Foam is petroleum-based, so upholstery and mattress manufacturers had passed along the increase of their raw materials to retailers over the past year. Our business absorbs cost increases as best it can before passing them along to our customers, and margins have been uncomfortably tight. The follow-up question was unavoidable: so, since oil prices have been low for months, we'll start seeing price reductions, won't we? Actually, no. They never reduce the price of a product; instead they'll introduce a new model at a lower price.

Our best selling sofa is a great deal for our customers, and it's been a best seller since it was introduced a couple years ago. Demand continues to be very strong. Yet the normally slim margin we make on it has become a sliver, due to price increases in 2008. How would it make sense to drop an item that our customers love, and replace it with a new, rationalized-cost model that customers may or may not like? I can't see that there's a winner in any corner: not the manufacturer, whose new item cannibalizes the old top seller, and risks lower return on the new model. Not the customer, who sees favorites taken away.

This was the beauty of Wal-Mart's 'roll-back pricing' marketing campaign: what a differentiator! The prevailing belief is that prices can only go up unless you have failed in some way: liquidations, over stocks, distressed goods qualify for reduced pricing. Perhaps the belief is that the consumer will assume that there's something wrong with the item if its price is reduced. This belief takes demand out of the system, it perpetuates a disposable consumer mindset, it is patently destructive. Yet, most of the retail market follows it in lock step.

As we survey a retail environment that is engulfed by economic disaster and uncertainty, it is time to think critically and clearly about the entire supply chain: what can we do to enhance value for all? where can we eliminate practices that destroy value? It is no longer the case that the consumer will rationalize the increase for us; it's our turn.