Gasoline at $1 a Gallon: Sales Miracle or Marketing Failure?

We work with a client in the consumer electronics industry. Recently ASP (average selling prices) in a certain category have collapsed...down almost 80% in 18 months. Despite large increases in unit volumes, the effect of lower prices have actually caused aggregate sales (and margins) in the category to decline. Smaller, niche players are being edged out by larger, higher-volume competitors.

Since there is quite obviously no cooperation among competitors, the root causes are predictable:

1) Indifferent/indiscriminent distribution "strategies" that emphasize short-term factory volume over long-term channel health;.
2) Too many competitors chasing too few customers;
3) Sceloric supply chains (especially among offshore suppliers) that can't adjust production quickly to avoid inventory gluts; and,
4) Fundamental misunderstanding of pricing elasticity in the category.

The consumer electronics industry has always been guilty of sins #1-3. Rabid consumer fascination with "new" gadgets will always breed a certain amount of waste. chasing the next "hot" product.

Sin #4 is simply a sin of hope over logic. The product in question -- front projectors for installation -- is an interesting case. Buying and installing a front projector for home theater requires a major commitment by the customer: a special, dedicated room, accoustics, seating, sound, etc. It is not a casual decision and certainly not something stimulated by low prices on one component -- the projector.

So, while the ASP of a high definition front projector has plummeted from $12,000 to $3,000, units sold have not quadrupled to at least break even. And, since volumes have not exploded, assumptions about contribution margin have likely disappointed all competitors.

New applications and segmnents have been created because of low prices, but dramatically lower margins are increasing risks for marginal players.

What's this got to do with gas? Imagine if ExxonMobil (or OPEC) suddenly lowered gasoline to $1 per gallon. Obviously there would be an immediate surge in sales. Perhaps other competitors would follow suit to avoid market share losses.

After a month or so, aggregate sales (for all competitors) would plateau, then plummet. How much gas can people use? Do they have storage tanks in the garages? Will they drive longer distances because gas is cheap?

Once the mistake was caught, raising prices would be like recapturing lost innocence. A quaint idea but largely improbable.

Are you selling gas for $1 a gallon? Can you walk away from market segements ruined by ignorant, irrational competitors? Can you embrace profitable niches while ignoring the siren song of unproven unit volume forecasts?

Price wars are legitimate tools to drive out weak players and grab marketshare. Happens all the time. But pick your battles carefully. Price wars for products with relatively inelastic demand, infrequent purchase frequency, and relatively high marginal cost is not a winning strategy.

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Chief Branding Officer: The new role for today's CFO

Senior corporate and financial executives are today focused on a defensive game (rigorous financial controls, Sarbanes-Oxley compliance and a cautious, almost limited approach to investor disclosure.)

Of course, corporate financial integrity and the resulting confidence it inspires among investors is a good thing.

Yet even in this current conservative accounting climate, management has an opportunity -- even an obligation - to focus attention on actions that maintain and grow the value of a company's intangible assets.

Maximizing corporate valuation goes well beyond solid operating performance, transparent reporting and shrewd management of a portfolio of hard assets. Brands, reputation, organizational culture, business strategy, intellectual property and core competencies are all vital "soft" assets that are not valued on any balance sheet. Effective corporate management teams consider and manage the value of soft assets and zealously and professionally as their tangible assets.

Proactive, targeted campaigns to promote these intangible assets can enhance the overall effectiveness of current operating plans as well as helping improve company valuation. In a sense, this is a corporate finance responsibility, not a mere marketing task.

CFO's can play a crucial role in this process by forging alliances with marketing departments. The "soft" artists (creative and innovative types) are greatly helped and encouraged by the patrons (CFOs). CFOs should relish this role and provide a mandate (senior management endorsement) and structure (accountability and metrics).

A brand (or corporate reputation) is one of the few balance sheet items that can increase in value through shrewd management and active cultivation. CFOs can lead this process by creating a corporate culture that measures the value of a brand and encourages all employees to care for it as they would any other asset.

Do you suffer from 'margin myopia'?

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Are you a successful marketer because you sell high-margin products?

Many marketers measure the success of their programs by the gross profit margin of individual products.

But is this true?  Margin myopia happens when companies focus too much on products individually and miss the larger view. 

Sure, everyone wants the prestige of high-margin products. But gross margin is an aggregate term of all product sales less direct and indirect product costs.   And selling only a few, high-margin products won't equal success if weak sales volume is insufficient to overcome overhead and operating costs.

Even if you are a small manufacturing company with limited SKUs, you are selling a broad range of tangible and intangible products.

What are "intangible products"?:

• Elimination of pain (since your product presumably satisfies some need, real or imagined).
• Reduction of stress (from a well executed, accurate and hassle-free purchase transaction)
• Satisfaction and ego gratification (from the customer making a purchase decision and giving you money)
• Status and prestige (recognition of peers and neighbors for a good purchase decision).

You get the idea.

Savvy branding, snazzy marketing communications and snappy industrial design all help justify high prices for tangible products. But lousy customer service, sloppy product quality, bureacratic credit and administration, or unreliable delivery (the intangible products) conspire to deflate margins and drive away customers.

Things get worse when declining or chronically low sales volumes put management on the defensive.  Being cheap (cutting the value of intangible products) to preserve high gross margins is a losing game.

The best way to avoid this trap: embrace the view that you are managing a portfolio of tangible and intangible products.   You must manage both categories of products to be successful.

Are you suffering from intense competition?   Create "new" products by revamping your customer service policies, credit terms (offering creative finacing options), extended warranties, expanded training, improved documentation.  Search for customer pain points and aggressively solve them. 

Don't get trapped by margin myopia.  Expand your thinking and manage the quality, design and delivery of all your products, tabgible and intangible.  Your accountant will thank you for it.

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