I saw this article last week in the USA Today while traveling, with the online headline “Products nipped, tucked to save.” That headline makes me think first of old fashioned cost cutting – which in these economic times often means trying to fool the customer by giving them LESS product for the same amount of money. That is not “value.” It's the opposite.
But in the Lean terminology, we always say “value is defined by the customer, going back to Womack and Jones' Lean Thinking
Unfortunately, many companies are giving you less for the same price – it's a sneaky way of charging more when companies don't really think they can get away with that. Lean and TPS thinkers realize that prices are set by the market – it's simple economics. Just because the cost of milk goes up doesn't mean an ice cream maker can jack up the price on a half gallon of Neapolitan. But if the “half gallon” is no longer 64 ounces, you might not notice that you're getting “less value for money” as the Brits would say. Makers of all sorts of food products – orange juice, Saltine crackers, Ivory Soap, Scott toilet paper, Hebrew brand hot dogs, etc. are pulling the same stunt.
Now Saltines is trying to offer “value” in terms of smaller packs within the box (shorter sleeves of crackers) so you get fresher crackers – fewer crackers, more internal packaging. Maybe that means value.
Thankfully, the USA Today examples are examples of customer focus and creativity, not cheating. They have found ways to reduce cost without hurting quality. Case in point, the maker of Wrangler jeans and other brands… no, they didn't save money by ditching Brett Favre as a spokesman (I think):
VF is switching to regular buttons on the flies of some jeans. Executives believed slightly bigger buttons “made a statement” and increased convenience, says Vice President Cindy Knoebel.
“We actually found that it didn't make any difference to consumers.” The move saves about 5 cents on each pair and millions overall for the company, which is paying more for denim due to soaring cotton prices.
If the larger button doesn't make any difference, it's not value.
Again from the article:
General Mills used to ship rice-based flour for Rice Chex from farms and mills in Texas to its Cincinnati plant. But with agricultural and diesel prices rising, it switched to a different rice from Arkansas that's less expensive and closer to Ohio. Costs fell about 4%, says Senior Vice President John Church. “You need to save 2, 3% in a lot of places.”
That's really just a smart supply chain and logistics move.
Last example from the article, I love this one:
Quality Float Works recycles oil that greases its factory machines to halve oil costs. The Schaumburg, Ill., maker of steel water-level sensors for tanks saw its oil costs nearly double from a year ago. “We can't” raise prices, says President Sandra Westlund-Deenihan. “There's a lot of people still out of work.”
Now that's a company that gets it. They realize they can't just increase prices willy-nilly. They have to be creative and find ways to reduce costs without harming the customer or harming quality (which hurts the customer and ultimately the company, too).
Now if you're a healthcare reader – what are some ways we can truly reduce waste from healthcare services? What are the things that we do that patients don't value? Can we find ways to reduce costs without doing away with things that patients like or value? Do you see more cost cutting or creativity in your workplace?
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In February Consumer reports said this was starting and I am now starting to see this in the stores. A 24 pack of Coca Cola is now packed with 20 cans but the price is about the same (which seems even too high for 24 cans!). Soda in restuarants usued to be $1.50 and now it averages $2.50 from fountains.
I always wonder why companies raise the price when their value doesn’t increase. ATMs are virtually unchanged in the last many years yet the fee for using one has gone up (often over $2 now). Maybe there is a lot of back-end security stuff I don’t see.
I think in many of these cases, companies charge what they can. If $2.50 was too high for a soda, people would start ordering water. Most fast food companies lose money on food and make it back on beverages. ATM fees – it’s because banks can charge it and we pay it.
It’s more honest for companies to just raise prices without the excuse of saying “we were forced to” or “we had to raise prices.” There’s also a lot of psychology in pricing. Paying $3.99 for 20 cans seems better than $4.49 for 24 cans?
I think there is a vast difference with what the market wants to pay for an item versus what they put up with. If the market pays the “charge what they can” price grudgingly then you have a satisfaction issue. Once a competitor comes in with more value for same price or same value for lower price, the customer will most likely move on.
I think the bottom line is that people speak about value with actions rather than words. For example, people complain about the high prices at NFL games, and yet the stadiums are nearly always packed. That means that the prices are actually too low.
On the other hand, look at Apple. People willingly shell out hundreds of dollars for every new release of an iPhone, and hype up the opportunity to do so. Apple could skip a generation of phone and pack in the features on the next one–greatly increasing the value to the user–, but they know their loyal users will buy either way.
I think people are pretty smart, though. When companies try to get over on customers, word gets out, and people vote with their feet.
Brian – yes, people often just “put up with” prices in the short term. “What the market may bear” should be a price that doesn’t ultimately drive people to alternatives. You might not have an alternative in the short-term, so you pay higher prices for gas. In the long-term, you might decide to start taking the train or to buy a more fuel-efficient (or electric) vehicle.
Jeff – good point on NFL… and all sports. If the resale market for a ticket is 2x to 3x the ticket price (or more, for the Super Bowl), why doesn’t a league or team charge more? Could it be the outrage and bad P.R. from charging true market prices outweighs the revenue? We can just demonize “greedy” brokers (something I won’t criticize, personally, as I often happily use brokers to get tickets to events I couldn’t otherwise get into). “Fair” market price is a price that somebody is wiling to pay.
Yes, people are smart and will vote with their feet eventually unless, for example, all soda makers use the same approach… but then again, there is ice tea and water as alternatives.
I did think of one health benefit of the trend to reduce sizes and keep the price the same – instead of raising prices. Maybe we can cut back some of that excess weight we have put on in the last few decades. Many studies have shown one (of many) reasons we are bigger now, is we just eat more when it is put in front of us. If the package of m&ms has less we will normally just eat less (not open and eat 15% of the second package). Now we could end up eating 2, which wouldn’t help :-(
So you can find a silver lining in the cloud. There have been many studies showing that serving sizes (in restaurants) and elsewhere have increased over the last few decades and really we eat up just because it is there – not because we really need it to not be hungry.
Of course, I fully support actual efforts to reduce waste and take out non-value added costs from the process.
It’s amazing what we can live without once we really think of it. Water instead of beer, pop, or wine? Works for me on a lot of occasions. Not always. Pro football? Never been to a game. College FB? Been to a LOT. IPOD? Got a 3 year-old version that holds maybe 200 tunes. Plenty for me. Do I really need/want a choice several thousand on there? I suppose some people do… Car? I drive a ’97 Honda Civic to work that gets me 36 mpg highway, is cheap to license ($35/yr.), requires minimal maintenance, and is paid for (who needs/wants car payments?). Doesn’t impress people, but I don’t glean much value from impressing people with a car, many of whom I don’t know and in some cases may not even like. Got a GPS, though. Saves me a LOT of time and gas.
What I’m saying is that if a lot of us re-evaluated our values, which impact what we value, we would define value for ourselves very differently. This would certainly have an impact on the producers and marketers of goods and services as well.
P.S. Andy Rooney is my long lost uncle.
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A 12 oz box of ‘Nilla Wafers is now 11 oz.
That could really screw up your holiday baking recipes (ala the “bourbon balls” I am going to make today).
The generic box of wafers is still 12 oz. That’s the one I bought.
Mark,
I think you have it wrong. The lost ounce of cookies isn’t the waste in that situation. It is putting good bourbon into a pastry that is the waste…
Jeff
Who said it was good bourbon? :-)