Different Is Not Always Better

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The U.S. economy has been weathering recession-like conditions for a while now, including job losses, home foreclosures, declining consumer confidence, lower business spending and inflationary pressures on some of our key production inputs.
Due to the cumulative impacts of these stressful economic conditions, we find several of our friends and colleagues are no longer working in the industry. Of those remaining, several I have interacted with have indicated their business activity is way down, but others say they have either been “holding their own” or “doing OK.” There has, however, been another (yet smaller) subset of growers that has indicated its “sales are up” or business has been “expanding” this year.

Surviving & Thriving

So naturally, this has prompted me to ponder how this can be. What is it that separates the folks who are just doing “OK” from those who are doing well? As usual, there is no easy answer, but I think there are a couple of major underlying reasons.
First, the severity of the economic downturn is not equal in all areas of the country. Some regions are experiencing more of an economic downturn than others. Therefore, growers who happen to operate and market in regions that are faring better economically find themselves in a more favorable market position. Also, for growers who also retail, they have perhaps benefited from the increased interest in “buying local” that has stemmed from the rise in fuel prices.

More importantly, I think the growers who are doing better in today’s economic climate have been proactive in shaving costs out of their value chain (either lean flow analyses or adopting technology/mechanization) and successful in differentiating themselves in the marketplace.

In marketing lingo, differentiation exists when customers [under conditions of competitive supply and faced with a range of choices]: (a) perceive product offerings that do not have the same value and (b) are prepared to dispose of unequal levels of resource (usually money) in acquiring as many of the available offerings as they wish. In plain English, different is not always better, but better is always different.

Creating Demand

It is a proven fact that customers use five different attributes in making a decision about what products and services to buy and from whom to buy them from – quality, price, service, convenience and selection. Value represents the tradeoff between the benefits derived from this varying mix of attributes relative to the sacrifices (dollars) made in getting them. So the key for growers is to provide greater value to customers. The interesting thing is that the difference in value customers perceive (when comparing your firm to competitors) can either be real or perceived (through various signals) you relay through your marketing efforts.

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 or service is considered relatively inelastic when the quantity demanded does not change much with the price change. Therefore, when the price is raised, the total revenue of the firm increases. Likewise, when prices are lowered, revenue decreases. What this effectively means is growers can actually raise their prices, and though they might sell fewer units, total revenue for the company still goes up.

So, the obvious question is this: How do we go about making local demand more inelastic? By distinguishing your company somehow in terms of perceived value (e.g. the mix of quality, price, service, convenience and selection attributes). That is why your marketing efforts are so important. They are the key to successful differentiation.

I do want to point out the only way 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 segments of customers it targets.

Raising Prices

So, obviously, differentiated growers should consider raising their prices incrementally over the next 12 to 18 months. I can hear the objections already: “If I raise my prices, my customers are going to defect and buy from my competitors.” Let me provide my own testimonial regarding this common objection to raising prices. Over the last few years, all of the green industry firms I have convinced (after much prompting and counseling) to actually try this have experienced an increase in total company revenue. Notice I did not say many or most. I said all.

Interestingly, some even found that per-unit sales actually increased when they raised 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, you can sometimes influence the price-quality connotation positively.

And another thing: stay the course with your marketing efforts. Growers actually need to consider increasing their marketing efforts during times of economic contraction. Yes, you read that correctly: I am encouraging growers to increase their spending on marketing right now.

As others make cutbacks (and marketing is usually the first thing to go during hard times), an increase in marketing efforts can lead to increased customer “mindshare.” While you should spend 3-5 percent of gross sales on marketing normally, consider increasing this to 5-8 percent. Speak when others are quiet, and even a whisper can be heard. Imagine if you shout!
Lastly, let me offer this bit of encouragement. The current economic downturn, though severe, is a normal part of business cycles. We have had 11 recessions since 1948.

What is my point? This is not the first downturn we have experienced, nor will it be the last. So take heart, tighten your belts and put your best differentiation foot forward to position yourself for the remainder of this downturn.

Charlie Hall (charliehall@tamu.edu) is a professor and Ellison Chair in International Floriculture at Texas A&M University.

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