Training in the Science of Pricing Can Enhance Profitability
By Kevin Mitchell, President, Professional Pricing Society
Everyone in business knows it’s all about maximizing profits. But nothing has as much impact on the bottom line as one thing: pricing. What’s the best approach for setting pricing and maximizing profitability in competitive marketplaces? In an era in which pricing is set by corporate culture, can be dictated by sales forces, and is reactive to the hyper-accelerated pace of price matching in a global market, what impact does a new, smarter, more strategic approach to pricing hold for businesses?
The Power of Pricing
More than any other variable, pricing has the most influence on the bottom line. In fact, the vast majority of incremental revenue from a price increase flows directly to the bottom line. For example, if a company typically makes 10 cents on the dollar but raises its price on a product to $1.01, then net profit increases 10 percent, demonstrating the age-old corollary that every 1 percent increase in price can result in a 10 percent increase in profits.
Yet many companies fail to give pricing considerations the time and dedication needed for optimum effect. Why is this? Typically, there are three reasons companies give pricing decisions insufficient attention:
- They often wrongly believe there is not much flexibility in price decision-making. Or they mistakenly think they need to either match competitive pricing or mark up a fixed percentage from cost of goods to meet preset gross profit goals. Many companies have built-in inertia and resistance to innovative pricing thinking, as well as a lack of awareness of the available tools and techniques for measurability and analysis.
- Companies with strong sales-driven cultures, by default, often place paramount importance on revenue and unit volume to the detriment of profitability. This is typically because sales quotas are based on revenue and volume, not profitability. And good, goal-driven, salespeople typically resist upsetting this status quo in favor of a smart, strategic pricing dialogue.
- Traditional consumer marketing thinking often influences business-to-business (B2B) pricing decisions. Many firms in all types of industries recruit marketing talent from large “academy” consumer marketing giants. These companies typically market commodity products, such as soap or diapers, with unique brand narratives. These high-turn, heavily advertised products generally are more sensitive to pricing swings and operate in a more complex environment involving coupons, premiums etc. It’s a far different world than most B2B environments and the pricing experience may not translate well to higher ticket or service-oriented businesses.
So what can be done to create the right environment that will support optimal pricing decisions in B2B companies? Changing a company’s approach and culture regarding pricing is possible:
Provide vigorous training: An in-depth understanding of pricing and its various models is not an inherent gift bestowed upon a few lucky people. No, pricing strategy is a learned skill, one that requires ongoing attention and training. Pricing strategy is an invaluable asset to any company and should be treated as such.
Seek out vigorous training programs and invest training dollars in accredited programs. Be sure to identify organizations that deliver ongoing training, serious testing, and insights on cutting-edge pricing tools, tactics, and technology.
Keep up on technology: Big data, when put to good use, can open up an organization’s eyes to pricing opportunities. Sophisticated tools can crunch mountains of numbers and provide guidance on opportunities such as value-based pricing, margin analysis, and prescriptive pricing, to name a few.
Joining professional associations is an efficient way to keep up on technology advances. Sharing experiences with peers on technologies that are easy to use; easy to implement; and deliver valuable, economic insights can pay real dividends.
Bolster the team: A good place to start is creating a senior position dedicated to pricing strategy. It’s becoming common to find individuals in mid-sized to large companies with the titles of vice president of Pricing Strategy or director of Pricing as part of executive teams. Their singular focus on identifying profits through smarter pricing directly affects the bottom line.
While some firms already have created such pricing positions, the majority of companies with less than $500 million in sales have not. In a recent survey, we sensed there was increased importance given to the role of pricing, with 26 percent of pricing professionals now reporting directly to top management. Investment in such a position, whether with a stand-alone job title or with additional training for an already valuable marketing or finance executive within the company, serves as a valuable counterpoint to the pitfalls noted above.
Continued Education: Enrollment in regular pricing industry conferences, such as the upcoming Professional Pricing Society Conference in April in San Francisco is a good place to start. At these events, pricing executives mix with sales, marketing, and finance generalists to share experiences with hundreds of other pricing professionals and become well versed in leading-edge diagnostic tools that can monitor the impact of pricing changes in real time.
These events also provide valuable opportunities to learn pricing strategies tailored for different market segments or even on a pre-customer basis, providing optimal pricing and profitability. And not to be overlooked, these events can explore best practices on how to effectively and efficiently change pricing bottlenecks in corporate cultures with regard to pricing. Besides attending conferences, there are Webinars, case studies, and white papers to be devoured and digested.
Bottom line, pricing is too important to get passed over. What’s needed first and foremost is a healthy respect for the benefits of an optimal pricing strategy, an awareness of the latest pricing tools, and the willingness to effect organization change in this vital area. Paying attention to pricing can have a new and profound effect on profits without the cost or risk of adding new product lines or entering new markets.
Kevin Mitchell is the president of the Professional Pricing Society, a worldwide learning organization dedicated to pricing training, education, and professional accreditation, as well as sustaining a vibrant culture of academic and real-world pricing expertise. For more information, visit www.pricingsociety.com