Warren Buffett recently said, “The single most important decision in evaluating a business is pricing power. 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.” Yet, in most companies pricing receives scant attention.
Data from the Professional Pricing Society indicates that less than 5 percent of Fortune 500 companies have a full-time function exclusively dedicated to pricing. Research from McKinsey & Co. shows that less than 15 percent of companies do any systematic research on this subject. Similarly, only about 9 percent of all AACS-accredited business schools offer courses that emphasize pricing significantly.
Despite this, numerous consulting studies suggest that pricing affects profitability both substantially and immediately. Small variations in price can influence profitability by as much as 20 percent or 50 percent in both directions. Are you paying enough attention to your pricing strategy? Who is managing pricing and value in your firm?
Over the past three years, my dissertation work has focused on better understanding how firms manage their pricing strategies. First, we interviewed 44 managers — from CEOs and CFOs to heads of business units and professionals — in 15 U.S.-based industrial companies. These varied in size from a few hundred to thousands of employees, and notably, differed dramatically in pricing capabilities.
In conducting this research, we identified common features of companies that have deployed pricing approaches as a key profit driver. Most important was that in successful companies, top management was attentive to two areas of their pricing function: the development and practice of skill in price orientation (or price setting) and price realization (or price getting). Armed with these qualitative findings, we asked more than 8,000 CEOs, presidents, and business owners around the world a series of questions relating to pricing. The findings revealed some interesting myths and facts.
Of the 100 points of attention allocated between cost-cutting, price-management and growth strategies, pricing received only 16 percent. Most attention, as expected, focused on cost-cutting, at 55 percent. While these top leaders indicated that pricing was strategically important, they paid little attention to it.
A commonly held belief that emerged from the research is that pricing is expensive, requires tremendous resources and is only for large firms. Au contraire! There are several steps in the pricing maturity progression model. But to get started, you can follow some of the simple steps:
Create a pricing council that meets every month just to discuss price trends, competitive pressure and new-product pricing prior to launch. Invite your marketing, sales and finance leaders and champion the process. Cost = $0.
Buy several copies of the best pricing book and give it to your staff to read. Then meet to discuss what you learn, what you can quickly adopt in your firm, and what the gaps are. Cost = $200 (depending on number of employees).
Send your marketing managers to a pricing conference held twice a year by the Professional Pricing Society. There you will learn from the best, meet top pricing professionals and get lots of insights. Cost = $2,000.
Take your best costing or financial analyst and give him or her responsibility to apply the basic techniques you will have learned in the book and at the conference. Cost = $0 incremental (part of your fixed cost).
Join our Western PA Professional Pricing Group on LinkedIn. This group gathers pricing and marketing professionals from the region. We meet twice a year, share best practices, and have fun. Cost = $45 in gas and food.
There you have it. You are at Level one of the pricing-maturity process. You have spent $2,245 in total to get started. We at Ardex, stand between level three and level four of this maturity model. Complexity and cost increase with each level. What you want to do is to find the level that suits you, your industry and your goals. Of the 15 firms we studied in 2010, 11 did not have a pricing function and did not manage pricing with intention. A staggering fact.
Stephan Liozu is President & CEO of Ardex America Inc. (www.ardex.com), an innovative and high-performance building-materials company located in Pittsburgh, Pa. He is also a PhD candidate in Management at Case Western Reserve University and can be reached at firstname.lastname@example.org.