Category Archives: AG Inputs

Equipment Manufacturers Feel the Pain of “Doing the Splits”

Over the past 25 years, the majority of land farmed in the Corn Belt has flipped from operations with less than 500 acres to those with over 1000 acres. The implication of this trend towards the larger farm operation managing a greater portion of production area is simultaneously being matched by the signification of smaller operations, which still account for > 80% of the farming operations. Nearly 50% of the farms less than 500 acres are smaller than 50 acres, and are frequently categorized as lifestyle farmers. The effects of this increasingly polarized customer base is having a dramatic impact on equipment providers this year. It is a key factor in why big tractor and harvester sales can be down by as much as 40% and small tractor sales are still realizing year over year growth!

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The challenge for equipment providers is to best serve and market to the differing needs for each of these divergent customer segments. The larger farmer is looking for performance out of their equipment to cover maximum acres in a targeted farming window with minimized cost and increased precision.

Meanwhile, those in the lifestyle farmer segment want a basic range of functionality in a comfortable environment at minimized cost.

The larger farmer is looking for service and support characteristics of where he buys, while the lifestyle farmer is looking for more of a retail experience similar to how they make most other purchases. Providers with a footprint in both markets are feeling the pain of “doing the splits”! Appropriately scaled product and marketing strategies are needed now more than ever to effectively serve the large and small farm operation segments.

Both large and small customer segments present opportunities for growth for equipment providers. The cyclical nature of farming forces manufacturers and dealers to look for the segments of customers with the most opportunity in the current stage of the cycle, and to find ways to connect and stay connected with those customers.

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Context’s proficiencies and knowledge in the equipment industry range from deep technical know-how on equipment functionality and precision technology integration, to strategic marketing and management training experience, to operational excellence in supply chain and channel distribution. The Context arsenal includes industry leaders and innovators who have served globally as vice-presidents, directors, and field employees of major equipment companies. We have the experience and expertise to credibly provide pragmatic, actionable solutions that are especially needed during times like these to focus equipment providers on their diverging customer base and best position for growth through the next turn in the commodity cycle.

Provided by Context Partner, Mark Nelson; Context Senior Associate, Doug Griffin; and Context Senior Associate, Kevin Monk. For further information contact mark.nelson@contextnet.com.

Defining Price: A Critical Component in the Market Mix

Market researchers have several different techniques for helping manufacturers set prices. Some lead to valuable insights, while others provide only confusion.

Carefully designed and professionally implemented quantitative research and data analysis together provide details that have a significant impact on outcomes.

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Pricing is one of the most critical elements of a product in the marketing mix. Companies have to pay money to design a product, to develop/build a product, and to promote a product. However, a product’s price is the only element in the marketing mix which generates an income for an organization. Pricing strategies based on sound pricing research provide companies with a price that reflects the supply and the demand integrated into the relationship.

The Role of Quantitative Research and Data Analysis in Price

There are many types of research tools that help companies identify and discover various pricing models. A few key techniques, presented below, have their advantages and disadvantages.

For the sake of discussion, let’s consider several pricing strategies and then revisit our example question posed in the sidebar: “How does Apple price their phones so successfully?”

  • Gabor Granger Price Laddering:  If a market researcher comes offering price laddering, politely show him or her the door. This technique asks respondents whether they would buy a product at price x, then whether they’d buy at price y, then at price z and so on. Research shows that once respondents have accepted a given price, they’ll feel cheated by any higher price, while lower prices won’t increase their intent to buy. So after that first price is shown, laddering doesn’t yield any useful information.
  • Van Westendorp Analysis: This is a more sophisticated analysis, but it is built atop a shaky foundation. Respondents are asked four questions about price:
    • At what price does the product become too expensive to consider?
    • At what price is it getting expensive but still within consideration?
    • At what price is it a good value?
    • At what price is it so inexpensive that doubts arise about its quality?

The responses are combined into a pricing curve that provides a range of customer-acceptable values. Two problems become apparent: 1) respondents quickly figure out the approach and give lowball prices, and 2) the range is often so wide as to be useless. For example, a manager might be considering a range of $15-$20/unit. Van Westendorp will often tell them to price it between $5 and $25.

  • Monadic Testing: This is the primary technique used by big volume forecasters like Nielsen, and if the normative database is robust enough it can be useful. Respondents are shown a description of the product at a set price and then asked their likelihood to purchase the product. By testing other prices with other respondents, managers can get a sense of the pricing that will be the most profitable. The trouble with monadic testing is its lack of granularity. It can tell only about the prices actually tested. Sure, managers can test a range of several price points, but each additional price can require hundreds more respondents, which gets really expensive really quickly.

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  • Discrete Choice: This is the best approach to survey-based pricing research. It simulates customers’ real-life purchase decisions by giving them a series of choices between sets of competitive products, each with price, brand, volume, level of service and other important product characteristics. The design can test several individual price points and the analysis can extrapolate the customer appeal for prices between them. Beyond that, though, it can then show the relative importance of each product characteristic and identify the optimal level within each – helping product managers optimize product development and focus resources. Its inclusion of competitive products also makes it a tool many manufacturers and marketers rely on for scenario planning. But discrete choice can be more expensive than other options, and without careful design it can lead respondents to be more rational than they would be in real life. When done well it provides clear insight on a range of issues, pricing included.

So which pricing approach does Apple use? None of the above – not even discrete choice. Apple doesn’t ask consumers for direction; if it did, it would probably hear that prices need to be lower…and yet people still line up to buy the latest iPhone. Apple designs products and systems, calculates the value that they will hold to the customers who will get the most out of them and prices them accordingly. Pricing lower would certainly increase share, but Apple’s focus is on a more important measure: profits.

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Context sees the value of quantitative customer research as an input that, when combined with deep industry understanding, can inform value-based pricing. This approach empowers clients to price strategically for their specific objectives.

Contact us to discuss your market research needs. Context provides a wealth of expertise in quantitative and qualitative market research design and data analysis, R&D, volume forecast modeling, insight generation and deployment, new product development and business plan creation, and competitive intelligence and market intelligence.

Context Senior Associate, John Ritzman has more than 15 years invested in helping Fortune 500 agribusiness and consumer products companies identify, scope, and develop business opportunities. John.ritzman@contextnet.com

Leading Strategic Change – A Key to Change: Deep Organizational Engagement & Involvement

We have the most educated workforce in human history. Younger generations of workers desire an opportunity to use their intellect to create and innovate. Many from the younger generations have grown up in more inclusive and team oriented environments, hence top down decision making and “marching orders” are less warmly received today than in the past. Our workforces are looking for greater degrees of leadership transparency and engagement. We are in a global transformation from command and control to self-organizing networked organizations. 1

Coupled with a changing workforce are our organizations’ cultures. What are cultures? The 1992 classic definition of culture is from Edgar Schein 2 “a pattern of shared basic assumptions that the group learned as it solved its problems of external adaptation and internal integration, that has worked well enough to be considered valid and therefore, to be taught to new members as the correct way to perceive, think and feel in relations to those problems.”

We are experiencing three noteworthy and converging forces simultaneously:

  • A significant generational change between the Boomers exiting and a highly-educated work force
  • Cultures that recycle proven steps, methods and processes which have solved problems of the past
  • Highly-dynamic marketplaces that are in constant flux with new products and services needed to maintain the competitive edge.

How does senior leadership implement new strategies and not have their culture eat it for breakfast?  Our first tenet in Leading Strategic Change is “Involvement.” Younger members of today’s workforce wish to be engaged and involved. They want to be connected to:

  • the DECISIONS that affect their customers
  • the TEAMS with whom they work
  • the SUPPLIERS they resource
  • the IMPLICATIONS to their own work habits, preferences and lives.

Ultimately, these highly capable workers wish to contribute their knowledge, experiences and skills to new policies and procedures. They seek full investment in new ideas, concepts and strategies.  

So when does leadership decide and announce versus deeply engage, gather, decide and announce?  It depends. If a rapid competitive situation, supply chain or regulatory issue exists, then senior leadership many need to take the traditional top down approach. If the strategy has deep, long term implications, will create significant change and will result in culture change, we recommend taking a deeper approach of employee engagement. The Context Network has resources to help plan and facilitate employee engagement creating involvement that will make Leading Strategic Change more sustainable and successful.

If you have other “change topics” or questions, please send an email to Senior Associates, Raquel Lacey Nelson at raquel.laceynelson@contextnet.com and Monty Miller at monty.miller@contextnet.com and we will address in future articles.

References

1 The Economist, November 23, 2013, pg. 68

Schein, E. H. (1992). Organizational culture and leadership (2nd ed.). San Francisco: Jossey- Bass

Portfolio Distractions – Figuring Out What to Stop Selling Can be Hugely Important

“General Managers and Portfolio Managers, this article is for YOU.” – Mike Borel, Context Partner

Context conducted a project for a regional business of a global company that identified products and SKUs that were taking more time than they were being charged, and therefore, reducing effort on other products. What did they do? Removed 25% (by number, half that by revenue) of a portfolio! Read on to know the story and the results.

Portfolio distractions cost money, time and opportunity. Let me tell you about a “real life” project we led on this subject. The client was a multi-country region of a major crop protection company with roughly 2000 SKUs which included old and new active ingredients, high margin and mid-range margin, and various formulations and pack sizes. The business was profitable overall and no individual SKUs were losing money – at least they were not losing money based on the accounting done.

Investigating the portfolio for possible distractions was an idea initiated by Context and ultimately driven by the general manager of this region. This manager wanted more time and energy on the newer and higher margin products and commissioned the study/project. The project was decidedly opposed by the Sales Managers and Country Managers – so much so that we talked often during the process about having a target on our front and back (see cartoon).

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We dug deep to find out how much sales and other time was actually going to each product or SKU. This resulted in a new financial summary. We then identified ~500 SKUs (including more than a few AIs) that were taking time and distracting the organization from doing everything possible to sell high margin and new products. We proposed some for sale, others simply for abandonment. The sales organization went crazy trying to stop this. The manager powered through (which was key) and made the changes.

What were the results? In the very next season, sales increased and margin/EBITDA increased even more (on only products that were in the portfolio the prior year). Everyone involved, including the sales team enjoyed a better bonus. The opposition went away.

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The Math:

100% (yr 0) – 12.5% (end of yr 0) = 115% (yr 1)

Context has the experience, knowledge, processes and resources to do this job for you. Interested? Contact us to discuss possible portfolio distractions in your business.

Cartoon © Gary Larson available at http://www.flickr.com/photos/gluv/298864264/lightbox/