Signode Industries

SIGNODE INDUSTRIES

Q. Should Signode Industries implement price flex

The decision about what product features to offer and what price to charge is one that is faced by every firm and every marketer. This decision hinges on many factors the business environ, the anticipated reaction of competitors, the effect to your bottom line as well as the wants of the customer. In 1984 Signode industries was face to face with such a dilemma - from being market leaders they were staring at an abyss which was pulling them down - their market share was eroding and their profitability levels were sinking fast and they were finding it extremely difficult to remain competitive and maintain their position in the steel strapping industry.

Background:

Over the years the competitors in the industry had stabilized their market position and relative price separation they were offering stiff competition with ruthless price cuts and aggressive growth strategies. Signode was able to maintain its leadership by offering more services than any of its competitors but it was doing this at a high cost to its profitability. Signode had the highest share and the highest average price in the industry, it differentiated itself from its competitors by offering special grade strapping and providing service which the competitors were not providing but times were changing and their was a paradigm shift in so much as the quality of strapping offered to the market was now equal for all competitors. The strategy of its competitors was to price their strapping at a consistent discount to Signode and although their products were undifferentiated they were soon breathing down heavily on Signode's neck - because the change in the business environ was to appreciate price discounts above service.

In this changing scenario Signode has to change itself or perish - the question is should it change its pricing or its product offering or a combination of the two in a two-dimensional, vertical differentiation model. They have to compete on product positions and then on price they have to chose which aspect they will have maximum differentiation and which they will have minimum. To do this they have to first analyze their product and customer portfolio - see not only how much the customer is giving them in revenues but how much it is costing to serve the customer and from their embark on a course to becoming a leaner and profitable organization in sync with the reality of the times. As evident in exhibit 7, majority of Signode customers are in the 4th quadrant. Signode has to conduct customer profitability analysis - estimate all revenue coming from the customer minus all costs and then weed out the unprofitable and undesirable customers.

Signode should be careful of discount pricing as a modus operandi - because once you establish that your list prices are 'soft' then discounting becomes the norm - since Signode is not in an overcapacity situation - its capacity utilization being 70% it should think of innovative ways of giving discounts selectively for e.g. make a bouquet of product and service or have service as a add-on at a discounted price. The value added service it offers can be charged at a lower rate than it would cost if it were sought elsewhere. With constant discounts Signode might end up losing long-run profits in an effort to meet short-run volume goals. In its strategy it has to make a trade-off between volume and profitability.

Price Differentiation - Price Flex

Customer Segment

Different customers groups should be charged differently - their high volume customers and low and mid-sized customers should having pricing matched to the business and profits they bring forward. As recommended by Mr. Dais the service oriented customers should be charged differently from the ones who just want the product as a commodity - so they don't bear the cost of service.

Product-form

Signode can also price different versions of the product differently example beyond a certain quantity the customer gets a discount.

Price on its own is never an adequate defense measure because no matter how much you lower your price your competitor can do the same, to be aggressive Signode has to implement price flex complemented by other measures some being as follows:

* Signode can also increase profitability by selectively decreasing market share. Maintain