I was enjoying my pastitcio when the conversation turned to Sterling Premium, as it seems to more often than I’d like.
In the company of good folks at our local Greek eatery, things had been just fine until that point. I was smothering everything in sight with as many lemons as I could get my hands on, and I’d have been content to discuss anything under the sun. But they wanted to talk Sterling Premium.
So we did.
I wasn’t lunching with NewPage; I happened to be breaking bread (okay, pita) with another mill. They had heard about the truckloads upon truckloads of Sterling Premium that were lining up at the SPC docks. The skids of custom-sized sheets had been delivered four days after receipt of order and were already speeding through Heidelberg presses at 18,000 sheets per hour. My lunch companions weren’t amused and they wanted in.
I explained my decision, simply. It was a premium sheet at a #2 price. It was perfect for high-end direct mail.
They seemed to have known what I would say, and they came prepared. They suggested two options: one stock not quite as bright, and another that is brighter than Sterling Premium, the typical choice of flamboyant designers in off-register videos. I listened intently.
Would they allow Sterling Premium to drag their flagship into the mud or would they play up their secondary composition?
I voiced my opinion that NewPage’s Sterling Premium provides a great opportunity for both mills. It created a wedge between two grades. It’s differentiated. And for SAPPI, it’s a beautiful gift. I know that seems counter-intuitive, but follow my logic.
Considering the possibility that SAPPI could reduce the price of McCoy to compete with Sterling Premium, I offered a contrarian view (true to form). McCoy has an unparalleled name and reputation. Why would they burn up all that valuable brand equity in a giant bonfire? By my estimation, rather than compete with Sterling Premium on price, they should raise the price of McCoy and further differentiate it as “the best-of-the-best.”
This places McCoy on the residual part of the demand curve. It’s akin to when brand name drugs lose their patents and become susceptible to generic competition. Most people might opt for the generics, but those who don’t are the most passionate, committed consumers. They’re the consumers with the most willingness to pay, and they can represent a real opportunity for the brand owner to milk that inelastic demand, increasing margins and maximizing profits over time.
Designers who still insist on McCoy are willing to pay more. And in my opinion, they should pay more. Jim Tyrone of NewPage knew all of this, which is why we have Sterling Premium. Jim went to Harvard Business School, and between being taught how to effectively use platitudes and be a great leader, he’s learned a thing or two about strategy. They teach these things at HBS. It’s that whole thing about pattern recognition, predicting what’s going to happen…all that stuff Herb Simon and Anders Ericsson revealed about decision-making in the middle part of last century.
So, SAPPI should do as all good profit optimizing firms do. They should follow the lead of the pharmaceutical companies and extract more from those who are willing to pay more. That’s what smart firms do. And NewPage now owns its own niche, one that currently includes a lot of high-end direct mail, including a lot of ours.
And when someone specs McCoy, I’ll be happy to order it for them. I’ll only increase their price and judge slightly.
And those lemons from our lunch? There were plenty left over for my companions to make lemonade.