"When bosses promise to make their companies more profitable they usually say they will do so by increasing sales or cutting costs. But a third road to profits is rarely mentioned: Putting prices up." (The Economist, July 2013). According to results to a PwC (PricewaterhouseCoopers) survey, The Power of Pricing, many companies in developed economies have exhausted cost reduction opportunities. And digital technology has made prices more transparent, resulting in greater customer churn - representing both an opportunity and a threat. So what's the story on price optimization?
First, which of the two following examples would be the the best pricing strategy?
* An increase of 1% in sales volume will typically have a 3% impact on operating profit, since together with the increased revenue there is a corresponding increase in variable costs.
* A 1% increase in average selling price will typically lead to a profit gain of 11%.
As pricing is one of the most powerful and effective ways to achieve profitable growth, here are some of the strategic pricing challenges that businesses face:
Many organizations don't spend enough time or enough attention on pricing as a growth lever (when you compare it to looking at innovation, digital, or other aspects of customer impact.
Companies didn't understand their true cost to serve across the customer base and many companies were taking a scattergun or uniform approach to that.
Understanding in detail the profitability of their different products and customers.
Using this information to influence pricing and focus sales and growth efforts.
Have in place the necessary structure, systems and processes to properly embed each of the other aspects in their price setting process.
The ability to monitor and control pricing across their business.
Why Companies Struggle To Execute
According to PWC, opportunities for companies are enormous, so what stops them from pricing right?
* Worry about public perception
* Worry about customer reaction
* Don't have their strategy clear in mind.
* Fear that if you cut costs, you may be harming your inventory and sales.
* Price structures are often out of date.
* Price structures of often out of line with the corporate business unity strategy.
* Prices haven't responded to changes in costs.
* Prices haven't responded to competitor activity
* Prices don't capture the full value of the products and services they represent.
* Prices don't reflect the willingness to pay of customers
* Retailers don't coordinate throughout their own different channels.
* Inconsistent management information often results in slow, ill-informed decisions
* Sales force doesn't implement the pricing structure agreed.
* The data doesn't exist in a form to help companies make good pricing decisions.
* The data can be overwhelming to collect and analyze.
* The systems need to support pricing are too slow or out of date.
Retail companies looking to deliver excellent pricing strategies and profits must:
1. Take a fresh look at pricing.
2. Track external factors effectively.
3. Use the information from tracking external factors to set prices.
4. Consider factors that impact the whole economy (e.g. commodity prices)
5. Consider factors specific to your industry (e.g. the pricing strategy of competitors).
6. Identify different groups of customers, understand their preferences, and use this information to establish their willingness to pay.
7. Use Pricing Intelligence Solutions from a sophisticated Retail Intelligence Company.
Bottom Line For Your Bottom Line
Pricing has a huge impact on your bottom line. Getting pricing right is critical, especially when it comes to: Launching new products and services; responding to competitors changing their pricing; looking to make multi-channel operations more effective; reviewing the profitability of your product portfolio; and responding to considerable churn from your products and services.
The PwC survey and our experience tell us that there are opportunities across the whole organization to improve different aspects of pricing to deliver profitable growth.
Often the need for pricing is relegated to only looking at product launches or tactical activities, but actually looking at pricing holistically all the way from strategy through implementation is the key to pricing profit.
To view the PwC UK report, The Power of Pricing, click here.