Beating a Dead Horse – On the Flanks

If you read enough of what Reed Holden and I have to say about how to manage difficult negotiations with customers that know they will be rewarded for playing pricing poker, you know that having low-value flanking products is critical to grabbing control of the negotiation – and keeping price-sensitive customers.

Here’s a question, what would you do if you didn’t even get the opportunity to negotiate prices?  If you are a grocery retailer, that is the environment that you operate in every day.  Yet they have a solution – private label store brands.  The use of private label store brands has been common for decades and it is a critical customer retention weapon during tough economic times.  Consider the following data points.  According to Nielsen, sales of store brands have increased 10% since the middle of 2008.  And in March of this year Kroger reported that an all-time-high 27% of its fourth quarter revenue came from store brands.

Now, it could be said that since grocery stores are essentially distribution businesses, it is easier for them to use this kind of multi-brand approach.  While it may be easier, that doesn’t make it any less important for businesses that sell directly to their customers.

Consider what happens if you don’t have a low-priced option.  You either negotiate heavy discounts on your higher value products or you lose the customer.  How much does that cost each year?  In most organizations the costs of not having a low-value flanking offering are far greater than the investment necessary to create and support one.  In Pricing With Confidence we talk about how Dow Corning introduced the Xiameter brand to fight low-cost Asian competition.  In the year before the launch of Xiameter, Dow Corning lost $28 million.  In the year after the launch, they produced a profit of $500 million.  Do you think that Dow Corning management is happy that they took on the challenge of getting Xiameter launched?