The Case of the Product Manager Who Increased the Price When Customers Said Lower It

Tom bets he can increase his product’s price.

Tom’s Problem

Tom needs to know how long he can harvest his business for short-term cash flow.

He is a product manager and sales of his product face an abrupt end. Tom’s customers produce aluminum sheet that they form into beverage cans. They asked for a price cut far below his firm’s guidelines for product profit margin.

Al producers use Tom’s product to coat what, after a can’s forming, will become the can’s interior surface. The coating prevents harmful reactions of the beverage with the surface. A competitor launched a higher priced, coating formulation which coats well at an equal price.

The world’s largest beverage distribution system, not the Al producers, is forcing the end of Tom’s product. The system’s goal is to quash misleading statements by European environmental activists. (Both Tom’s and the competitor’s coating products meet US and Europe regulations for beverage safety.)

Tom’s Solution

Tom knew of my expertise in outside-in market research. He hired me to help him understand two issues.

  1. What are the beverage can industry’s opinions about the major system’s action?
  2. What are options does Tom have for harvesting his business for short-term cash flow?

Executive Summary: B2B Customer Research on the Beverage Can Industry

All respondents heard this description of the client’s new coatings formulation

“I’m on assignment from a client that has developed a new coatings formulation for beverage cans. On a bench scale they have demonstrated that with this formulation clear coatings are formed with good protection of the aluminum.”

Forty-seven respondents entered into deep interviews with me.1. 2

  1. Beverage can industry prefers the competitor’s product because Coca-Cola stopped buying cans coated with Tom’s product.

George, the beverage can industry is very conservative. Liabilities are enormous. If someone thinks you’ve poisoned them … God help you.
People in the industry remember the problems Gerber had with pieces of glass in some baby food jars. Gerber missed sales to a whole generation of babies because of consumers’ perceptions of danger.”
     Senior Coatings Chemist … Ball Packing Operations

“For choosing an internal coating, Coke rules the world. Last month a major customer said, ’Some activists question the safety of XYZ (Tom’s product). Don’t waste your time coming to us with scientific facts on safety. Change it to what Coke uses’.”
     European Business Dev., Mgr. … Pechiney Aluminum

  • Coca Cola is the major buyer, worldwide of Al beverage cans.
    • In the US, in 1997, Coke’s and PepsiCo’s combined share of the volume of soft drinks sold in Al cans is >75%.
    • In the US, in 1997. Anheuser-Bush’s and Miller’s combined share of the volume of beer sold in Al cans is >70%
  • Activists attack the safety of both coatings. Attacks on Tom’s product are difficult to quash. Attacks on the competitor’s product are easier for Coca Cola to quash.
  1. Complete switch from cans coated with Tom’s product to cans coated with competitor’s product is 3-4 years in the future.

Be aware it’s our franchisers and Coke’s franchisers who are dragging their heels on the switch. We make the beverage syrup and sell it to franchisers. These are the guys who have to lay out the capital for new filling lines to accommodate the new cans.
And they say, ‘Hell No. Until I absolutely have to do it, I’ll hold off on switching’.”
     VP Can Development … PepsiCo

Options for Tom

  • Raise the price of his product by <= 30% … now.
  • In < 4 years stop production of the product.

Outcome

  • Tom raised the price of the coating formulation by 30%.
    • The next summer was hot and he raised prices 100%.
      • The 50-year old plant ran at full capacity.
  • At the end of 3 years the plant was closed.
  • Over the 3 years, Tom’s price increases harvested $80 million in positive cash flow.

Endnotes

  1. Al sheet producers interviewed … Alcan, Alcoa, Maxxam, Pechiney, Reynolds. Beverage makers … Anheuser-Busch, Coca-Cola, PepsiCo
  2. My key skills for this project
    Elicitation
    Rule of 30 System