GUEST AUTHOR BLOG: A Small Change in Price Can Go a Long Way by, Chris Goodin and Mike Simonetto, co-authors of “Pricing and Profitability Management: A Practical Guide for Business Leaders.”
Pricing may be the most powerful lever that managers can pull to give their business a competitive edge. No matter the size or type of business, a small change in pricing can result in huge, sustainable benefits for any organizations’ bottom-line. Of more than 950 business managers polled during a recent Deloitte webcast, titled“Pricing and Profitability Management: Finding Hidden Pockets of Profit,” 82 percent reported that just the slightest increase — a 1 percent pricing improvement — could boost profits significantly.
Why then do so few organizations use pricing to its fullest advantage today?
Simply put, they are somewhat intimidated by the relatively complex nature of price management, and many companies still lack the internal capabilities, organizational structure, and data analytics capabilities to take advantage of this critical function.
But pricing competency is quickly becoming table stakes as some companies are starting to make the investment to improve their capabilities. The more an organization can focus on setting and achieving profitable prices, the better it may be able to respond effectively to changing customer, competitive and market conditions.
Take a Holistic Approach
While many executives focus on setting prices with marketing and sales teams, they may neglect the role that finance, information technology, human resources, legal and other teams have in managing price execution. But a company-wide approach to pricing is pivotal, since all aspects of an organization actually touch price.
"Regardless of what you are selling, now is the time to really fix what may have gone wrong with your pricing in recent years."
However, this fact may not be so well understood: when asked to describe their companies’ current pricing management on the webcast from earlier, just 24 percent of executives reported taking a holistic approach that touches all areas of their businesses. In addition, 22 percent reported that their company doesn’t pursue pricing management strategically.
Organizations should stop letting sales teams make tactical ‘gut feeling’ pricing decisions and start thinking more strategically. As simple as it may seem to focus on more fact-based pricing decisions, leaders should focus on price-value selling and a disciplined process for capturing price in transactions.
For example, one of our industrial manufacturing clients performed price band analyses and found up to a 50 percent variance in the invoice price for the same product, in the same region, with the same competitors. After providing new price guidelines to its salespeople—in effect, shifting corporate strategy and cultural norms—the company raised the median price by 12 percent. That price management improvement resulted in more than $19 million in benefits while driving a 1 percent increase in year-over-year volume.
Regardless of what you are selling, now is the time to really fix what may have gone wrong with your pricing in recent years. And even companies already advanced in their price management capabilities can benefit from further improved price adjustments. Just remember: it takes cross-functional and C-suite involvement to determine that the pricing decisions made are in the best interest of the company. As much as any other function, pricing reflects the essence of an organization’s strategy. Companies that improve price management could, quite possibly, add significant revenue to their bottom lines; conversely, those that don’t may/potentially leave significant money on the table.
Chris Goodin and Mike Simonetto are two of the co-authors of “Pricing and Profitability Management: A Practical Guide for Business Leaders.”