|
Authors Marn, Roegner, and Zawada discuss some of the key pricing issues that can have a major effect on corporate profitability.
 | | | | | How important is pricing excellence to a corporation? Answer |
| | | | Why is it so difficult for corporations to get pricing right? Answer |
| | | | How can corporations begin overcoming these obstacles? Answer |
| | | | We read about price wars all the time, how appropriate are they as a pricing strategy? Answer |
| | | | Isn't price simply a function of the free market that companies cannot influence significantly? Answer |
| | | | Is there a difference between the price advantage and overpricing? Answer |
| | | | Many companies are quite concerned about even the appearance of price fixing. Do antitrust laws and regulations give companies much leeway here? Answer |
| | | | What expertise do the authors bring to this topic? Answer |
| | | | When all is said and done, is a good pricing strategy a matter of correcting problems around a corporation and being more diligent? Answer |
| |
| | | Why a book on pricing? | | Pricing, although one of the most critical management functions, remains one of the most misunderstood and undermanaged functions at many companies that are otherwise high performers. Pricing is far and away the most sensitive profit lever that managers can influence. Very small changes in average price translate into huge changes in operating profit.
The universe of pricing concepts and knowledge has advanced significantly over the past several decades, with business and academic journals regularly featuring articles on the topic. This book, however, is not designed to be an exhaustive review of the considerable body of pricing theory that has accumulated over the years. To the contrary, this book has been written as a practical pricing guide for that thoughtful general manager who has been tempted by the unrealized promise of improved pricing and, perhaps, frustrated by attempts to translate pricing theory into bottom-line impact for his or her business. It is intended to provide a logical and structured approach for identifying where the most precious sources of untapped pricing opportunity reside in a business, along with practical, case-illustrated guidance on how to capture that opportunity.
| | | | | | How important is pricing excellence to a corporation? | | | Very important. Because pricing right is the fastest and most effective way for companies to grow profits. The right price will boost profits faster than increasing volume; the wrong price can shrink profit just as quickly. In fact, very small improvements in price translate into huge increases in operating profit. When you talk about creating a pricing advantage, you may have to recalibrate your thinking about the significance of very small change. Pricing initiatives that increase average prices by only a quarter or a half percent are important because they bring disproportional increases in operating profit.
| | | | | | Why is it so difficult for corporations to get pricing right? | | Very few companies have achieved a level of competence in pricing that could be described as a price advantage. A number of factors explain why companies undermanage the opportunities inherent in pricing and why so few businesses have ever developed a pricing advantage:
Under past buoyant economics brought on by strong demand and sharp cost cutting, many companies sensed little need to develop advanced pricing skills and to pursue pricing as a source of increased profits.
Companies often did not believe that pricing was manageable. They saw prices as set by the market, customers, or unreasonable competitors.
Data to support pricing decisions was either not available or not current enough to help with real-time pricing decisions.
Price differentiation and other pricing actions were misperceived as always being illegal, and therefore degrees of pricing freedom were internally limited.
Pricing mistakes and errors were hard for most companies to detect. If your sales representative in Scotland negotiated a price that was 5 percent lower than it could have been, it was unlikely to raise a red flag at headquarters.
Frontline pricers often had virtually no incentive to stretch for an additional percent in price.
Senior managers often had little, if any, involvement in pricing.
| | | | | | How can corporations begin overcoming these obstacles? | | Taking an integrated approach is a start. Since pricing means different things to different people, it is important to integrate each constituent’s viewpoint. Understanding the three levels of price management is a first step in getting a handle on the challenge of pricing. The first level considers overall industry price levels. The second is price positioning relative to competitors. The third is deciding on the exact price to assign to each and every customer transaction. Each level is an integral part of the broad pricing dynamic. They reinforce each other and define the level of which companies truly excel at pricing issues, opportunities, and threats.
There is a natural hierarchy to the three levels of price management. The industry price level is the most general, with its orientation around pricing issues that have an impact across the entire industry. The product/markets strategy level entails a tighter scope that focuses on value specific to a customer segment, particularly on setting list or base prices by segment. The transaction level is the most detailed, with its microscopic focus on individual transactions and customer pricing.
| | | | | | We read about price wars all the time, how appropriate are they as a pricing strategy? | | | If you have ever imagined that reducing prices to gain share and increase profits might be a sound strategy for your business, think again. Unless you have a dominant cost advantage – by this we mean costs that are at least 30 percent below the competition – reducing prices all too often triggers a suicidal price war. Price cuts are almost always followed quickly by price cuts from competitors; no one wants to lose customers, volume, or share. The best-run companies go to almost any lengths to avoid price wars.
| | | | | | Isn't price simply a function of the free market that companies cannot influence significantly? | | | Companies that excel at the highest level have a better understanding of the supply, demand, cost, and other trends that affect overall industry price levels, and of the factors that drive these trends. They independently and unilaterally become proactive in facing and encouraging the trends that benefit the industry, rather than passively accepting the market’s invisible hand. Using their superior understanding of the industry’s microeconomics, they can adjust their tactics ahead of the market, for instance, by avoiding long-term, fixed-price, deals just before an expected upturn, or by adding new capacity in a way that matches expected increases in overall demand. | | | | | | Is there a difference between the price advantage and overpricing? | | | The price advantage is not about gouging customers or employing tricks to gain undeserved revenues. It is about delivering the right price for each market segment, customer, and transaction. That right price may be higher or lower than existing prices. When the price advantage does result in a higher price, it should be viewed as a source of organizational pride. The highest compliment a customer can pay to a supplier is to knowingly pay more for that company’s goods and services. In doing so, the customer is saying, “You are higher priced, but you are worth it; you are superior to my other supplier alternatives.” Businesses that, lacking the pricing advantage, fail to have their superiority rewarded with higher prices often lose their drive – and even their ability – to continue to be superior.
| | | | | | Many companies are quite concerned about even the appearance of price fixing. Do antitrust laws and regulations give companies much leeway here? | | | While the laws have implications for many aspects of pricing behavior, they provide relatively little black-and-white guidance, but many shades of gray. In most cases, legitimate business objectives can be achieved by adjusting the approach to correspond with the degree of risk a company wishes to assume. More often than not, this risk is manifested in trade relations issues or sometimes civil litigation and adverse publicity, rather than full-scale government investigations. Pricing strategies followed by almost all businesses are affected by the law, but many companies respond by closing their eyes to the implications unless called to task or by adopting an ultra-conservative approach that misses many opportunities. Pricing law is constantly in flux, and companies should always consult specialized attorneys if they believe their actions might conflict with applicable law. | | | | | | What expertise do the authors bring to this topic? | | | Consistent with our basic approach of taking the top manager’s perspective to all business problems, we have always viewed pricing, not as a narrow and siloed management function, but rather in the context of overall business strategy. We see pricing as a crosscutting and integrating function, and that view – we believe – should help make this book relevant for general managers. Furthermore, this integrating view keeps our client work in pricing and this book focused on generating real improvements in bottom-line performance. Throughout this book, you will see that only theories and concepts that can be readily converted into tangible improvements in business performance are discussed.
| | | | | | When all is said and done, is a good pricing strategy a matter of correcting problems around a corporation and being more diligent? | | Deciding to pursue the price advantage launches a company on a transformational journey that can touch almost every aspect of its business system. Capturing the price advantage is not about a handful of clever pricing tips and tricks. Instead, it requires a change in mind-set and capabilities in marketing, sales, operations, finance, and any other part of the organization that touches pricing decisions.
Managers invariably encounter cultural and even emotional resistance along the journey. The freedom to set price can be seen by individuals in marketing and sales as central to their personal power and authority within the organization. When empowered with pricing authority, a sales rep or a sales manager ultimately has the power to decide who the company’s customers will (or will not) be. Pricing authority may even heighten the customers’ perception of the importance of an individual in the sellers’ organization. So, when that authority is controlled more tightly, which often occurs as an organization moves to create the price advantage, some resistance is unavoidable.
As with some sustained change program, commitment and stamina are necessary to create the price advantage. While some quick wins are usually found early in the journey, the real returns are typically seen over several years, as a company develops and institutionalizes its pricing knowledge and continually improves its pricing capability. Time and again, we have seen that pricing success breeds upon itself as initial targets are reached, and successful teams pursue and attain increasingly aggressive targets. But before this virtuous cycle takes hold, a company must embark on a deliberate agenda to ensure that constructive pricing change occurs and is maintained.
| | | | |
|
|
|
| | The Price Advantage | |
 | Author Interview | |
| |
|
|
