Differentiation and the pricing of non-comparable products

The challenge is to earn money with the special products, which no competitor is able to produce. For the customer it seems that they have good prices because if he compares the more conventional products with the competitor, everything seems ok, but for the other products he cannot compare. He is not able [because they are unique to Delta]. We get orders because the customer thinks that the price is as good as for the conventional products. This is a big challenge for everyone working here to give the customer the feeling that we are very good in our pric-ing, very competitive, so that the customer does not notice that he overpays for the special products. (Sales manager, Delta)

Delta’s overall business strategy is product differentiation. The focal point is offering products and services with a superior and non-comparable value to the customer. The sales manager describes this

strategy, in terms of the product portfolio, as focusing on pre-print and advanced design. This type of product differentiation, dating back to when the plant was built in the mid-sixties, has been achieved by an early focus on larger companies in the local food and confectionary in-dustry. This is an industry for which advanced print and design of pri-mary packaging and in-store display are essential. From the very begin-ning Delta came to excel at high quality printing (pre-print instead of post-print) and advanced design. The focus of Delta was a result of the developments in the retail industry during the sixties where traditional small family-owned stores were being replaced with larger supermar-kets. The emergence of large supermarkets resulted in packaging be-coming one of the main instruments for food companies to influence the consumer’s “in-store” experience of the product. This presented an opportunity for packaging companies to differentiate themselves through such things as high-quality printing and design. According to the sales manager, Delta was one of the first companies to bring these new ideas about packaging to market, which over the years has allowed Delta to develop a close relationship and tie to major brand leaders in the food industry.

The innovation and the use of the pre-print method for corrugated packaging were focused very early. So we were the first ones to bring this idea to market and it was a big success. Why did we do this? When the company was built in the mid-sixties there was a change in the trade scenery. I do not know whether it is the right expression, “mom and pop” stores, […], very small stores where the lady gives you the product. This changed in the sixties as supermarkets came along. Over night, the packaging had a new dimension, because now it was the packaging that sold the product, and not the product itself. This was important because the customers cried for very good printed packaging.

It was the first way to manipulate the consumer, to have a good pack-aging with the association of a good product. Forty years ago it was not possible to have a good printed packaging with the Flexo-print; you could only print directly on the corrugated board. With the pre-print came a totally new dimension of printing quality. Customers like Kraft food demand optimization for their packaging, that is the reason that up to now over 50% of our customers are coming from the food indus-try. (Sales manager, Delta)

Most customers demand that their packaging supplier not only accepts orders for advanced packaging, but also conventional packaging, which means that Delta is often forced to accept orders for conventional

pack-aging when acquiring a new customer. Having both conventional and more complex products in the product portfolio requires a somewhat different pricing. Conventional products are, according to the sales manager, used as a way of entering the customer’s business; this re-quires that they are priced lower. Thus, the pricing of conventional products is intended to send the message that Delta is competitive, while more complex products are priced with a relatively higher mar-gin, which is difficult for the customer to notice because he is not able to benchmark those products. Hence, the pricing policy of Delta relies on both market oriented considerations and a cost-plus profit approach for less comparable or differentiated products. The strategy stated above is related to Delta’s pricing policy, which is built on a “customer by customer” approach that focuses on achieving stability over time in each individual customer relationship. Pricing is conducted in a fairly conservative manner that does not directly depend on the current utili-zation rate of machines. According to the sales manager, the pricing of Delta is different from many other regional packaging suppliers in that Delta does not adjust prices to counter short-term fluctuations in de-mand or machines’ utilization.

The main instrument for developing and implementing pricing policy at Delta is the budget process. The yearly budget is built up once a year based on the structure of the total incoming turnover that is reported by the external sales reps by product group and customer. The budget-ing process starts with all external sales reps meetbudget-ing in Delta with a list of all customers and their current turnover. The meeting usually lasts for two to three days. Each external sales rep has a list of his customers with actual revenue figures. The external sales, together with internal sales, then set the budget per customer for the coming year (in turn-over). Once the turnover is set for all individual customers the numbers are consolidated into a budget. The main procedure is bottom-up budgeting, but there is also a top-down element in the budget process in what is called in the “needing phase” in which plant management sends a signal to the sales reps that, for example, more volume is needed. The sales reps then reply by either saying that it is not possible or by adjusting the budget to the requirements.

In addition to the budget process, weekly profit reports also constitute an important tool for developing and evaluating pricing policy at Delta.

The management team meets once a week to evaluate the profitability of the product portfolio based actual post-calculated costs. Once a month actual post-calculated costs are compiled per order and customer and compared to budget in a more extensive report. Hence, one key element in the weekly and monthly budget follow-ups is the post-cost calculation system. This system allows Delta to evaluate the profitabil-ity of the individual customer and products based on reliable and actual costs rather than relying on pre-calculated costs.

6.5.3 National sales organization and local pricing