Pricing is a complex subject, and becomes even more so in an economic environment that is either low-growth or weakening, where demand can be faltering or perhaps precipitously declining.
While achieving highly effective pricing strategy and pricing management can be a challenge, the impact as far as increased profitability can be outsized. As seen in a recent Deloitte Review article, titled “The price of pricing effectiveness…” (pdf) :
…a broad study of company performance and pricing reveals that, regardless of industry, geography or size, companies with effective pricing capabilities significantly outperformed industry peers across multiple financial metrics, including net margin, market valuation, return on assets and return on equity.
One study suggests that pricing has two to four times the potential to influence profitability relative to other business levers.
Furthermore, other evidence as well as calculations demonstrate the potential leverage pricing has on revenues and profitability.
In addition to benefits to better revenues and profits, other benefits accrue to those companies with successful price management, such as increased competitiveness, larger – and likely more defensible – market shares, and increased success rates for new products.
Implementing successful pricing management practices does present challenges. In addition to the variety of strategic and analytical skillsets, as well as requisite information technology and other support systems, there are numerous other managerial issues to be addressed. Many of these other issues can be complex.
Inside the company, there has to be a structure in which pricing decisions can be properly made, implemented, and communicated. Who is the final decision maker on such pricing issues, and why? A range of other issues are presented, including cost structures, cost accounting and cost allocations, incentives and compensation, and internal communication issues, to name a few.
Outside the company, a range of issues have to be considered, such as what is the optimal pricing structures given various market dynamics and how pricing decisions – especially those that may prove unpopular – are communicated to customers.
Achieving effective price management can differ significantly among companies, and as such, it is inadvisable to generalize. However, the benefits of effective pricing practices – and the detriments of lack of such – tend to be very important at any time, but grow in importance in an economic environment such as that seen today, in which both revenue and profitability are under pressure across a broad range of companies.