Setting aside your willingness to accept the premise that your product is undifferentiated from your competitors (topic for another day), let’s look at the two pricing postures you could have when selling product in a commodity market:
1) Surrender to the market, be victim to volatility, blindly trust The Market to generate returns over time, or…
2) Actively set pricing that best serves your business objectives.
If you’re selling commodity boneless breast meat, pork bellies, ground beef, etc, the temptation is to view yourself as a price taker – a costly mistake.
While some sellers are comfortable passively trusting the market to generate returns, here are 4 ways to keep your company out of the price taker trap:
– Identify your strategic objective. Sellers should always have strategic reasons to be slightly above or below the market. The reasons to price below the market are fairly obvious (fresh product, clearing inventory, etc.) but what reasons have you identified to price above the market?
– Leverage asymmetry of information. I heard someone say recently that it’s harder dealing in a partially opaque market than it would be to deal in a fully opaque market. Whether that’s true or not, Information flow in commodity markets is rarely efficient….even more so in beef, pork, and poultry markets where published market prices and real market prices are two distinct numbers. If you know the published market price is only a guideline, how are you leveraging asymmetry of information and establishing higher prices for your product?
– Know who is pricing your product. Published market prices are (by definition) based on your competitors’ self-reported prices. So if you are religiously relying on USDA or other published price, aren’t you in effect letting your competitors price your product? Another common approach is talking with customers to “see what the market is doing”, in that case aren’t you by definition allowing your customers to set your prices? There’s got to be a better way that puts YOU in control of pricing.
– Take a portfolio view. Instead of looking at individual transactions or products to generate profit per pound targets, how would your process and outcomes differ if you took a portfolio view of transactions across all products? The portfolio approach allows you to consider tradeoffs around profit, risk, and market share in more strategic ways than a one off transaction approach does.
There are strategies and tactics to increase margin that begin with taking a different view on pricing as a discipline, even (especially?) in commodity markets.
This journey starts by shifting your mental model from passive price taker to active price strategist.
Which do you choose?
This post was originally published on Meatingplace.