Article

Commentary: Focus on profit generation rather than revenues

Driving competitors out of the market using low prices doesn't always work.

August 3, 2011

By Dale Furtwengler

In a June 3, 2011 article in Booz & Co's strategy + business titled "A Sweet Victory," Reed Holden and Mark Burton highlight Hershey's victory over Nestle in the Krackel vs. Crunch war.

Using an aggressive pricing strategy, "...a 30 percent trade discount on Krackel where other brands hovered in the 5 to 10 percent range," Hershey drove Nestle from the vending machine market "...boosting the brand's [Krackel's] revenue by an incremental $25 million."

Let me see if I have this right. Hershey is shifting production capacity to produce an additional $25 million dollars of candy bars at a margin that's 20 percent to 25 percent lower than the industry average and they think they won. It's 10:30 on a Thursday morning and I feel like I need a drink already.

The thing that amazes me about strategies like this is that they always focus on the additional revenues generated, not the profits. In other words, they're looking at market share instead of profitability. I guess if that's your measure of success, you did win.

But for those of us who measure success in terms of profits generated, Nestle is the hands down winner in this one. I'm sure that Nestle didn't sit around bemoaning this loss. It merely shifted its resources to markets and products that produce higher margins. The best and brightest simply don't play the fool's game of following a "competitor" down a path of rapidly decreasing prices.

So what's the message here? If you feel an inclination to drive one of your competitors out of the market using low prices, do the math and you'll quickly discover who the loser will really be...and it won't be your competitor.

Dale Furtwengler is a professional speaker, author and business consultant. His latest book, "Pricing for Profit," is dedicated to helping organizations break the bonds of industry pricing.