“Pricing receives scant attention in most companies,” reports the MIT Sloan Management Review. The numbers:
“Fewer than 5 percent of Fortune 500 companies have a full-time function dedicated to pricing, according to data from the professional pricing society.”
Moreover, McKinsey & Company estimates that fewer than 15 percent of companies do systematic pricing research.
As article authors Andreas Hinterhuber and Stephan Liozu note, “This neglect is puzzling, as numerous studies have confirmed that pricing has a substantial and immediate effect on company profitability…. [In fact,] small variations in price can raise or lower profitability by as much as 20 percent or 50 percent.”
So, what’s the answer? Focus on two areas: price setting and price getting.
Too many companies set prices based on their own costs or on the prices of their competitors. Those elements matter, but they ignore the most important factor: customer demand.
The solution? Something the authors call “customer value-based” pricing. “Instead of asking, ‘How can we realize higher prices despite intense competition?’ customer value-based pricing asks, ‘How can we create additional customer value and increase customer willingness to pay, despite intense competition?’”
As for your ability to realize the prices you set, it’s often easier said than done, particularly when you sell through diverse channels and offer numerous packages and discounts. Not to mention salespeople’s tendency to tinker with pricing to close a deal.
The hypothetical comparison chart above offers a guide for bringing more rigor to bear on this critical (but often overlooked) aspect of company operations.
As if they needed further evidence of the importance of pricing strategy, the authors cite Warren Buffett, who voiced his feelings on pricing power in a story on Bloomberg.com.
“The single most important decision in evaluating a business is pricing power,” said Buffett.
“If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business.
"And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”