Pricing Perogative: Most Companies Call Pricing a High Priority, But 85 Percent Say They Have Significant Room for Improvement
06/13/2018 | 01:16pm EDT
NEW YORK, June 13, 2018 (GLOBE NEWSWIRE) -- Poor pricing practices can haunt a company and go unnoticed for years while they slowly chip away at profits. According to new research from Bain & Company, Is Pricing Killing Your Profits?, most companies agree pricing is a high priority, but 85 percent say they have significant room for improvement. With substantial margin upside at stake, companies cannot afford to continue pricing by guesswork or rules of thumb.
Bain & Company conducted a global survey of sales leaders, vice presidents of pricing, CEOs, CMOs and other executives at over 1,700 companies, collecting their self-rating of 42 pricing capabilities and outcomes to understand which pricing capabilities matter most. The analysis showed that top performers are more likely to exceed their peers primarily in three areas:
Employing truly tailored pricing at the individual customer and product level;
Aligning incentives for front-line sales staff with the pricing strategy; and
Investing in ongoing development of capabilities among the sales and pricing teams, through training, best practice sharing and tools.
“Companies across industries tend to underinvest generally in pricing but, regardless of a company’s starting point, our analysis reveals that excelling across these three pricing capabilities can pay off,” said Ron Kermisch, Bain & Company’s global pricing leader. “Among the companies that excel in all three areas, 77 percent are top performers.”
Bain & Company explains why these three areas have such a strong effect on pricing:
Pricing to the average is always wrong. One-size-fits all pricing actually fits no one.More advanced companies tailor their pricing carefully for each combination of customer and product, continually working to maximize total margin.
Bad incentives undercut the best pricing strategy. Incentives have a strong effect on behavior. Managers often criticize sales reps for losing a deal, but rarely for pricing a deal too low, so reps learn to concede on price until the deal closes. The antidote is to align compensation with strategic goals, and enable field sales reps to see the effect of changing price on their own compensation. Their incentives should align with those of the company. In many cases, this requires maximizing price without sacrificing volume.
Training, tools and forums – often an afterthought – can have a big payoff. Top performers invest in building capabilities of the pricing team through training, tools and forums for best-practice sharing. Given the cross-functional nature of pricing decision-making in most companies, pricing leaders extend this capability-building well beyond core pricing professionals. This runs counter to the norm at many B2B commercial organizations, which give little or no formal training on both the “how” and the “why” of price realization. Further, most companies can raise their game by adopting foundational pricing software tools, though they must ensure those tools are utilized well and that their insights are acted upon. Using dedicated pricing software is associated with 2.5 times stronger pricing outcomes yet pricing software still has only 26 percent penetration across surveyed companies.
“Companies that address pricing on an episodic or project basis often fall well short of making pricing a genuine competitive advantage,” said David Burns, a pricing expert within Bain & Company. “Pricing is one of the most valuable levers a business can pull to increase its overall profitability.”
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