Ellison Chair in International Floriculture
Ellison Chair in International FloricultureTeaching, Research, Extension and Service

On the Road Again

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After being out of the office at 5 different meetings over the last two weeks and talking to literally dozens of folks about their business performance this spring, I am convinced now, more than ever, that those who are successfully differentiating themselves from the competition are weathering this economic contraction better than those who aren’t.

Not that there isn’t some belt-tightening going on. There is plenty of that, but those who are focused on their marketing strategies [and even expanding them] are confident that they are gaining ground instead of losing it.

What can we learn from Saks???

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The wider economy was the scapegoat for Home Depot, which posted a 66% drop in net income. However, Saks Fifth Avenue appeared unbowed by the difficulties and continues to illustrate the way luxury brands can avert some of the pain felt by other retailers.

The economic downturn has been particularly difficult for home-improvement chains such as Home Depot and rival Lowe’s. The retailers are double-teamed by a drop in the housing market and a slowdown in consumer spending.

Saks was the inverse of Home Depot, posting a 66% increase in net income. How does this happen? How does a firm selling in the luxury market experience an increase in sales during a period of economic contraction?

The answer, for the umpteenth time, is differentiation. In this case, a level of service and perceived value (notice I did not say low price) that is unparalleled by other stores. For related rantings, see my earlier post regarding the elasticity effects of successful differentiation.

In a recent American City Business Journal interview, entrepreneur brewer Karan Bilimoria describes the type of innovative thinking that helped him build his business. Bilimoria said the keys to success can be described in three key points: Be different; be better and create new markets.

Consumer preferences for container gardens

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A recent article published by Dr. Terri Starman (TAMU) et al. in the April 2008 issue of HortScience is entitled Consumer Preferences for Price, Color Harmony, and Care Information of Container Gardens. The abstract of the article’s findings is below.

Retail sales of container gardens have increased dramatically in recent years, rising 8% from 2004 to 2005, to $1.3 billion. The objective of this study was to determine consumer preferences for three attributes of container gardens; color harmony, price, and amount of care information provided with the purchase. A hierarchical set of levels for each attribute was used in a 3 x 3 x 3 factorial conjoint analysis.

A Web-based survey was conducted on 18 Oct. 2006 with 985 respondents. Survey participants were asked to complete a series of questions on a 7-point Likert scale. Survey participants also answered questions about past experiences with and future purchase intentions of container gardens as well as demographics. The three attributes accounted for 99.8% of the variance in container garden preference. Relative importance decreased from price (71%) to amount of care information (23%) to color harmony (6%).

Survey participants preferred a container garden with a price point of $24.99, extensive care information, and complementary color harmony. A large portion (76%) of participants in this study indicated that they would be more likely to purchase a container garden if extensive care information was included with the purchase and 85% of participants said they would be willing to visit an Internet Web site that would provide more information on how to care for and maintain a container garden.

Results of this study show that there is a potential to increase the value of a container garden through providing educational material with the purchase.

The Home Depot "Index"

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Home Depot Inc. said Tuesday that fourth-quarter profit fell a sharper-than-expected 27% after the declining housing market hurt demand for its building and home goods supplies and the outlook for 2008 remains “challenging.”

Declining housing and credit markets have hurt consumers’ appetite for home supplies provided by Home Depot and rival Lowe’s, which said Monday that profit dropped 33%, with sales at stores open at least a year declining 7.6%.

To reduce costs, Home Depot said in January it would cut 10% of its headquarters staff, following moves to slow the pace of its stock buybacks and advertising-spending growth. The company, however, said it remains committed to $2.3 billion in capital spending this year. Home Depot has spent money on projects to make stores cleaner and brighter and improve customers’ experience after it lost market share to Lowe’s and other competitors.

What to make of this?

  • DIY retail sales will most likely continue to crawl. Of course, this is no surprise since lawn & landscape services have increased in recent years to offset declining DIY sales due to more DIFM (do-it-for-me) purchases.
  • Growers who sell to Home Depot and Lowe’s will still need to offer differentiated programs as usual — and pay particular attention to shrinkage and gross margin on a store-by-store basis.
  • Landscape service firms need to ratchet up the marketing efforts — especially emphasizing the return on investment from lawn & landscape improvements (see earlier posts).

An Economic Justification to Raising Your Prices

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In the January issue of GrowerTalks, Chris Beytes provided us with some excellent case studies of firms that have recently raised their prices (great job Chris!). I think it merits repeating that the only way in which this makes sense economically is if the company successfully differentiates itself in the mind of the customer in terms of the types of products or services offered and the segment(s) of customers that are being targeted. It is a well-proven fact that customers use five different attributes in making a decision about what products/services to buy and from whom to buy them from – quality, value, service, convenience, and selection.

We economists characterize demand by a concept called the price elasticity of demand which measures the nature and degree of the relationship between changes in the quantity demanded of a good/service and changes in its price. An important relationship to understand is the one between elasticity and total revenue. The demand for a good/service is considered relatively inelastic when the quantity demanded does not change much with the price change. So when the price is raised, the total revenue of the firm increases, and vice versa. What this effectively means is that green industry firms can actually raise their price, and though they might sell fewer units of the product they are selling or the service they are offering, total revenue for the firm still goes up. So, the obvious question is this…how does one go about making their local demand more inelastic? The answer…by making the firm unique and different somehow in terms of quality, value, service, convenience, and selection! That’s why your marketing efforts are so important. They are the key to successful differentiation.

In summary, if your company is successful in differentiating itself from competitors, you are essentially making your firm-level demand more inelastic within your respective trade area and you can subsequently raise your prices and [even though you may sell fewer units] total firm revenue will still increase.

Now I can already hear the objections: “If I raise my price, my customers are going to defect and buy from my competitors.” Let me provide my own testimonial regarding this common objection to raising price. Over the last few years, all (100%) of the green industry firms that I have convinced [after much prompting and counseling] to actually try this have experienced an increase in total firm revenue. Not many, not most…ALL. Interestingly, some even found that per-unit sales actually increased when they increased their prices, which tells me they were pricing their products way too low to begin with. Low prices tend to result in a low quality perception in the mind of the customer and when you raise your prices, sometimes you can influence the price-quality connotation positively.

To bring this to a close, lean manufacturing and shaving costs out the value chain is important as the industry matures, but if we [as an industry] are to make any meaningful increase in our margins and increase profitability, it has to come from the demand side of the equation, whcih means we must obtain higher prices for the products and services we offer!