3M (NYSE:MMM) is not just a company but a multi utility brand in itself with product lines ranging from Scotch tape to cosmetic dental braces. Look around in your room and you are bound to find a product from the 3M bandwagon.
For the last three years 3M’s pricing has seen a consistent rise which clearly indicates that the company has a very strong market hold due to which it can steer the price upwards in an era when all other companies are looking into competitive pricing considering the competition in the market. Truly 3M has a very strong pricing tool in place.
Let’s analyze 3M’s pricing tools further and their outcome on the business health of the company.
Revenue growth not dampened by price rise
The gradient of price rise of 3M’s products has been to the tune of 1% on an average every year. The organic local currency revenue growth for the first quarter of 2014 stood at 4.6% in which 1.2% rise was due to the price increase. The major reason for continued sales growth despite the price rise lies in the ability of 3M to introduce innovative products.
3M is among those companies that invest heavily in research and development to innovate new products and sustain the growing demand in the market. For example, in the past, to pass on a phone number to someone we used to tear a full page from our note book and barely use 5% of the space to write down a number. To bring in a dramatic change, 3M introduced the intelligent yet simple “post-it” pads of such sizes which ensured the optimal usage of stationery space.
One third of 3M’s sales are originated from the product lines developed in the last five years and the company manages to regularly add variety to its basket and offer new products to consumers. Continuous innovative product launches by 3M have helped create an uptick in product prices without any substantial fall in sales.
Due to the uniqueness of its innovative technique, 3M follows a two way pricing policy. The new and unique product is priced at a premium rate owing to its uniqueness and lack of competition; however the older products are also priced competitively in order to keep pace with the cheaper alternatives in the market.
Looking at the success rate of this equation, 3M has decided to increase the investment in R&D from the existing 5% to 6% of its total sales by 2017. This could help in sustaining the base level of organic growth and continue to drive overall pricing.
Focus on currency fluctuations
As 3M is a U.S. based company selling its products worldwide, one important factor playing a major role in its balance sheet health is the foreign currency fluctuations. 3M has used its pricing tool tactically to even ease out such critical issues. Let us have a sneak peek at how 3M uses its pricing tool to address the regional currency value differences against the dollar.
3M increases its product prices in regions with weak currencies in order to offset the negative impact when the sales earning is valued in dollars. In 2013 and the first quarter of 2014, weak emerging market currencies tempered the company’s organic local currency sales growth by 1.6% and 2% respectively. The pricing strategy followed by 3M for tackling currency fluctuations reflects the business intelligence of the financial brains steering its business, and is a bright area for the investors trying to judge the business expertise of 3M.
In the first quarter of 2014, 3M escalated the prices of its products in the Latin American region by 6.4% to ease out the weakness of the currencies such as the ‘Real’ of Brazil or the ‘Peso’ of Mexico. Similarly, the Asian region also saw a price rise of 3M products by 0.5% owing to the weakness of the Asian currencies.
On the other hand 3M’s management maintained a price rise of only 0.8% in the EMEA region owing to the strengthening of the euro by 1.5% against the U.S. dollar. The intelligent pricing by 3M coupled with the positive growth of the regional currency in the EMEA region did translate into a positive movement of the sales figures by 5.5% in the region.
3M knows well how to price its products as per the requirements of different geographical locations, around the globe. The pricing strategy has been solid till date and augurs well for generating robust sales and firm profits for the company.