Song Zhiping's Dialogue with Herman Simon: There can Be No Real Profit in a Price War

At present, the vicious competition in the industry with price war as the main means has brought troubles to many enterprises. To this end, Song Zhiping, a well-known management expert, president of China Association of Listed Companies and chief expert of China Enterprise Reform and Development Research Association, and Professor Hermann Simon, a famous German management thinker and author of the best-selling book Winning by Pricing, held an in-depth dialogue in Beijing on September 23 on enterprise pricing strategies and how to avoid vicious competition.

Song Zhiping is a member of the three National MBA Education Steering Committees and a member of the China High Quality MBA Education Accreditation Council. He is a professor of enterprise practice in Tsinghua University, Peking University, University of Science and Technology of China and other universities, and has written "Business Strategy", "Asking Management", "Enterprise Myth" and "Three Essence Management". Song Zhiping has won many honors such as yuan Baohua Enterprise Management Gold Award, Ishikawa-Kano Award and Fortune CEO Lifetime Achievement Award for his outstanding achievements.

Simon is a professor of business administration and marketing at the universities of Mainz and Bielefeld and a visiting professor at Harvard Business School, Stanford University, MIT, London Business School, INSEAD and Keio University in Tokyo. He holds honorary doctorates from universities in China, Poland, Slovenia and Germany. In China, there is a training institution named after him, "Herman Simon Business School". He has published more than 40 books in 30 languages, including world bestsellers on invisible champions and price management, such as Invisible Champions and Pricing to Win.

Pricing has a tenfold impact on profits.

Song Zhiping: I have been your reader for many years. The first book I read was your Invisible Champion, which I explained in a TV program. Then I read your book "Pricing to Win," and now you've published a new book, "Real Profits: No Company Has Ever Gone Bankrupt Because of Profits.". Actually, there is a connection between these books. I just came back from Yiwu yesterday and visited Shuangtong Straw Company. Their gross profit is only 8 cents for every 100 beverage straws they produce, but last year the revenue of the straw business reached 400 million yuan. They have taken a road of innovation and brand, and even made a straw different. They have also adopted the route of high quality and high price, not making low-end products, not fighting price war, and have made considerable profits. Double children's straw is a typical "invisible champion" of specialization and innovation, and you also regard it as an important case in the book. Its chairman, Mr. Lou Zhongping, also asked me to convey his greetings to you.

Herman Simon: Mr. Song, I am also very happy to discuss with you the issues related to enterprises and "invisible champions".

I believe that China and Germany have many common topics and can learn from each other. Both China and Germany are very important economies in the world. We have many opportunities for cooperation in the economic field. In particular, both countries are strong in exports and have their own advantages. Invisible Champions focuses on leading mid-sized companies in various industries around the world. Just now you mentioned a very famous straw company in China. In the past, we have also found that similar "invisible champion" enterprises in China are growing rapidly. Compared with three years ago, the number of "invisible champions" in China has increased by more than 100. Accordingly, Germany has added about 250 "invisible champions".

We are currently facing a similar background, and I am very happy to be able to communicate with you today on these issues.

Song Zhiping: Mr. Simon, today, besides the topic of "invisible champion", I would also like to ask you to talk about the issue of product pricing. In Chinese business circles, people are already familiar with the "invisible champion", and China is currently promoting the development of specialized, special and new "Little Giant" and individual champions. At present, a prominent problem faced by enterprises is that many industries are engaged in price war. After the publication of your book "Pricing to Win", I sent it to some colleagues and entrepreneurs, hoping that you can study product pricing through the ideas in the book.

In Real Profit, you mentioned two little formulas: profit equals revenue minus cost, and revenue equals sales volume times price. In this relationship, many enterprises feel that they can control costs and increase sales, but they can't do anything about prices and feel very passive. Therefore, people take reducing costs and increasing sales as the main means of competition. This is also the deep-seated reason for our involution, and some enterprises even reduce prices indefinitely. Today, we also hope that you can talk to Chinese entrepreneurs about pricing issues, and how enterprises should grasp the competition and how to compete under the condition of surplus.

Herman Simon: Just now you mentioned the current situation of some Chinese enterprises and the problems of price war and involution. I'd like to share my thoughts on pricing in two ways.

On the one hand, my personal history and the history of the company I represent. I have taught in universities for 16 years, during which I mainly studied theoretical and academic issues related to pricing. After that, I founded Simon, a management consulting company, together with my doctoral students. Globally, we are in the business of pricing consulting. We put the pricing theory into practice to help the firm make solid profits. Today, we have 2,200 employees and 47 offices worldwide, with revenue of 5 in 2023. We are the global leader in pricing consulting, with three offices in Shanghai, Beijing and Hong Kong, China.

On the other hand, it is about Chinese enterprises. Looking back on the development history of Chinese enterprises, at first, they basically won the market with low price, low quality and low cost, and competed globally. But in recent years, great changes have taken place in Chinese enterprises. We have noticed that the cost of Chinese enterprises is also rising, which means that the price of Chinese products also needs to be raised. Of course, the quality of Chinese products is also improving, and China's technology has made great progress, but Chinese products still have weaknesses in brand. Among the top 100 global brands in 2023, China has only two: Xiaomi, ranked 87th, and Huawei, ranked 92nd. What Chinese enterprises need to do is to continuously improve their product value, innovation ability, service ability and product quality, just like well-known enterprises and brands in the world, so as to enhance their brand reputation and popularity in the world. What

Chinese enterprises need to do is to continuously improve their product value, innovation ability, service ability and product quality, just like well-known enterprises and brands in the world, so as to enhance their brand reputation and popularity in the world. —

Herman Simon

But it should be noted that the promotion of brands is not achieved overnight, but requires years or even decades of efforts. Our primary service offering is pricing strategies for large and medium-sized businesses to improve margins and achieve growth. The profit is equal to the price times the sales volume minus the cost. According to our research, there is a tenfold relationship between pricing and profit, while there is only a sixfold relationship between cost and sales volume, because when sales volume increases, the corresponding cost will also rise. We support Chinese enterprises to improve their profits, because only profits are the key to the survival of enterprises.

Pricing has a tenfold impact on profits, while costs have only a sixfold impact, and sales have only a fourfold impact, because when sales increase, the corresponding costs will also rise. — —

Herman Simon Some industries

in China are facing the problem of surplus and price war. In fact, both of these situations will have a negative impact on corporate profits. We hope to improve corporate profits through refined pricing strategies. The price

should be determined by the value provided to customers. Song Zhiping: Recently, the central government has proposed to strengthen industry self-discipline and prevent "involution" vicious competition. In fact, some industries engage in "involution" competition, which is very undesirable because it involves blind price reduction. When prices fall too low, the whole industry is prone to losses. This is the problem many of our businesses face today. Low price means no profit, and no profit may also affect the value of the enterprise and bring a series of problems.

Mr. Simon is a pricing expert who has helped more than 10,000 companies around the world set prices. I hope you can provide more guidance to our enterprises on pricing in the future. We find that many enterprises give the pricing power of products mainly to salesmen, but in fact, the price should be set by managers. I remember Kazuo Inamori once said: "Pricing is management, and pricing determines life and death.". Pricing should not be determined by salespeople, but by business leaders. But many business leaders believe that prices are set by the market, and they feel helpless and misunderstand. Everyone is focused on grabbing market share, focusing only on sales volume and cost, but ignoring pricing, feeling that they are unable to control. In fact, you also pointed out in "Pricing to Win" that managers should take the initiative to master pricing, rather than passively adapt to prices. It is believed that "Winning by Pricing" has a good reference value for today's Chinese entrepreneurs. This publication of "Real Profit" is also a companion piece to "Pricing to Win", because it is based on the premise that only good prices have real profits, revealing that profit is the foundation of an enterprise, without profit, it is impossible to survive, and the relationship between the two is very clear.

Pricing is operation, and pricing determines life and death. Pricing should not be determined by salespeople, but by business leaders. Kaz

uo

Inamori hopes that our entrepreneurs and readers will listen to Mr. Simon's advice, listen to your voice, and read "Pricing to Win" and "Real Profits" carefully. These two books are useful for everyone to do business. In particular, although it has been published for several years, we should seriously review it today, which is also very meaningful for Chinese enterprises to solve the current problems.

Herman Simon: You really know a lot about pricing and margins. I also have a few points I'd like to add to share with you. We have investigated the pricing issues of many businesses around the world, covering thousands of companies. We found that 59% of companies were involved in a price war, and the most serious country was Japan. In Japan, 86% of enterprises participate in a highly fierce price war, which inevitably leads to low profits, so the profit margin of Japanese enterprises is only 2. The price war in China is also very fierce, but the profit margin of Chinese enterprises is not as low as that in Japan. Price wars are profit killers. Therefore, in order to avoid a price war, we need to adopt a reasonable pricing strategy. Under the prevailing surplus conditions in China, it is actually difficult to avoid price wars. The first thing we need to do is to control and reduce capacity as much as possible.

For example, the price war faced by the photovoltaic industry, or the price war between electric vehicles and internal combustion engine vehicles in the automotive industry, is very dangerous. Just now you also mentioned that in Chinese enterprises, salesmen have more pricing power than management. I think this involves the issue of pricing strategy. We need to take the pricing strategy back to management and let management set clear pricing rules. When doing price positioning, we need to think about where we want to go and how to get there, which is related to product value. Price should be based on the value provided to the customer, not the other way around. What we need to do is to provide precise value to our customers. Customers are only willing to pay

if we can provide them with precise and clear value. The higher the value, the higher the price the customer is willing to pay. So this brings another challenge, which is that we need to continue to innovate, which means researching new technologies and using them to meet customer needs. A new technology has no value if it doesn't meet customer needs and satisfy them better than existing technologies. Therefore, we need to focus on customer needs, meet them, and provide customers with high-value products and services to achieve high pricing and higher profits. Globally, some Chinese enterprises still lack sufficient experience in "going out", including experience in pricing and sales strategies. What Simon Guhe has done is to provide pricing strategies with an international perspective for these Chinese enterprises going global. A new technology has no value

if it doesn't meet customer needs and satisfy them better than existing technologies. We need to focus on customer needs, meet them, and provide customers with high-value products and services to achieve high pricing and higher profits.

We need to gradually upgrade the low-cost and low-price model of Chinese enterprises to the high-end market in order to set higher prices. You just mentioned that price affects the stock price of a company, which is true. We have done several studies in Europe and the United States to explore the relationship between pricing announcements and stock prices. The stock price of a company is also related to its brand. I find that many Chinese enterprises are very dynamic. I would like to get your views on costs, prices and share prices.

We need to gradually upgrade the low-cost and low-price model of Chinese enterprises to the high-end market in order to set higher prices.

Hermann Simon

03

It is not advisable

to grab market share by price war. Song Zhiping: I have worked in the field of building materials for 40 years, leading enterprises from small to large. The building materials industry is also a very competitive industry in China. In the past, I have done a massive consolidation of the Chinese cement industry. Maintaining

Many enterprises participate in low-price competition in order to expand their market share. After the price reduction, the opponent will retaliate, leading to a round of price decline. In fact, the enterprises that launched the price war did not gain much market share, but greatly reduced the price.

Song Zhiping

On the other hand, enterprises need to move from the Red Sea to the Blue Sea, an important point is innovation and brand building. For example, Huawei has recently launched a three-fold mobile phone, which has achieved good results in the market. This shows that, as you said, enterprises should attach importance to innovation, technology and brand, and create real value, which is the core of pricing. But for many traditional enterprises, such as large cement, steel and chemical enterprises, price may be very important. If the price of their products is reduced, they may face a loss of the whole industry. Therefore, we should pay special attention to the pricing problem, because unlimited price reduction will lead to the loss of the whole industry. I put forward the concept that the interests of the industry are higher than interests of the enterprise, and the interests of the enterprise are bred in the interests of the industry. "When the nest is ruined, how can eggs be finished?"? Of course, cooperation is not collusion, but requires self-discipline in pricing. Market economy is a competitive economy, but competition includes benign competition and vicious competition. We advocate healthy competition, that is, orderly and self-disciplined competition. Vicious competition is blind price reduction.

Song Zhiping

Some industries engage in "involution" vicious competition and lack self-discipline. Because of vicious competition and large-scale price reduction, the whole industry will face losses. We hope that enterprises can rationally view market competition.

Today, our dialogue begins with the "invisible champion". We also hope that you can talk more about competition theory and pricing principles to Chinese entrepreneurs and various industries, and provide more guidance. This will help entrepreneurs understand how prices are formed, how to set reasonable prices, and how to avoid "involution" vicious price wars. This is crucial for Chinese enterprises and various industries. In fact, there are two views

about involution. One is that involution will promote competition, reduce costs and gain low-price competitive advantage. Another view is that enterprises should conduct orderly and healthy competition, focusing on technological innovation, quality improvement, brand building and service enhancement, rather than relying solely on price reduction and low prices to fight price wars. I agree with the latter view and advocate healthy competition among enterprises. Enterprises should be cooperative and self-disciplined, while improving technological innovation, quality, brand building and customer service, so as to add value, rather than just competing on price.

Enterprises should be cooperative and self-disciplined, while improving technological innovation, quality, brand building and customer service, so as to add value, rather than just competing on price.

Song Zhiping

Herman Simon: You have been in charge of such enterprises as China Building Materials. In fact, the competition in this traditional industry is also very fierce. I would like to share my experience with you again. There is a German automobile spraying factory, which used to do very well in the industry. Previously, there were four very large automotive spraying factories in this field in the world, including two from Germany, one from Sweden and one from the United States.These two companies from Germany are listed companies, and their production capacity is excessive. After the financial crisis in 2008, one of them withdrew from the industry because it went bankrupt, and the other reduced production. Since then, the other two companies have gradually adapted to the market, and there has been a reduction in projects, but Germany's "invisible champion" companies have emerged in the process, with great growth, thanks to their pricing and industry advantages. In the future,

we need to refer to the modern model of "invisible champion" enterprises, that is, they have their own business ecosystem. Like some traditional machinery enterprises, they should have their own core technology, corresponding software, even AI technology, sensors, laser technology, and so on. But companies like this are unlikely to be developed by themselves, because it takes a very long time. Some high-tech enterprises, such as a German company, develop and produce products by looking for business partners to provide the technology and products they need. The company also selects suppliers from China for trial production. It also selects suppliers from Israel and France. Suppliers from five countries jointly provide corresponding spare parts for one of its products. This is a global collaboration model for the future, sourcing globally and finding global business partners to build extremely complex technology systems together. This is a new path for us to take and a high-tech world for us to create. Apple has 767 suppliers from Germany, many of which are invisible champions, which jointly provide Apple with their own products and services. For example, a company from Hamburg provides 19 kinds of glue for Apple mobile phone system, and two other suppliers jointly provide more than 30 kinds of glue products for mobile phones, which is the deep technical cooperation mode and global cooperation mode we will face in the future.

I recently wrote a book, Effective Operators, which focuses on some thoughts on how to make the right choices in today's uncertain environment. In my book, I also discussed the problems of enterprise competition and competition, put forward five measures to overcome the industry's internal volume, and explained how enterprises can change from quantity, cost and profit to price and profit, that is, in the case of market shortage, "quantity, cost and profit" is more effective, but in the case of serious market surplus, enterprises should pay more attention to "price, cost and profit". We also need to stabilize the price. The book also quotes some of your views on "invisible champions" and "pricing wins".

In the case of market shortage, "quantity, cost and profit" is more effective, but in the case of serious market surplus, enterprises should pay more attention to the management concept of "price, cost and profit", that is, stabilizing prices, guaranteeing quantity and reducing costs, even if the amount is reduced appropriately, they should also stabilize prices.

Song Zhiping

Herman Simon: Mr. Song is a business thinker with profound insights into business operation and management. Your views are very meaningful to guide the stable operation and healthy development of Chinese enterprises. I also look forward to more exchanges in the future, so that enterprises can create more "invisible champions", start reasonable pricing, and ultimately achieve real profits and greater achievements. Thank you.