I just read for the first time a Harvard Business Review article, “Three Rules for Making a Company Truly Great,” by Michael Raynor and Mumtaz Ahmed (April 2013). The rules come from a statistical analysis of thousands of companies over decades.
Here are the three rules as written in the article:
1. Better before cheaper—in other words, compete on differentiators other than price.
2. Revenue before cost—that is, prioritize increasing revenue over reducing costs.
3. There are no other rules—so change anything you must to follow Rules 1 and 2.
When I read these three rules, here is what I read:
1. Pricing is important.
2. Pricing is important.
3. Pricing is the only thing that’s important. (Exaggeration?)
Let’s be a little clearer on why these all say “pricing is important”:
Better before cheaper. This says, “Don’t compete on price.” Build products that are better than the competition. The price you can achieve in a competitive market depends on only two things: the price your competitor charges and how much better you are than your competitor. If you’re not better, then you are probably competing on price.
The authors claim companies should be focused on making products, services or support better. Absolutely. I would add to that: Choose to resource the projects that add the features your market values more. In other words, the capabilities that enable you to charge a higher price. Focusing on price focuses you on better.
Revenue before cost. Revenue is made up of two components: price and quantity. Many companies expend copious resources increasing quantity by managing their sales force, motivating their sales force and even training their sales force. However, they practically ignore the other side of revenue: price.
Companies have an immense opportunity to increase revenue by managing price more effectively. That doesn’t mean just charging more. It means understanding your customers’ willingness to pay, using price segmentation, building products that matter to your segments. It’s not a trivial task, but it is amazingly profitable. Focusing on price has a huge impact on revenue.
There are no other rules. Confession: In my world (my mind?), price is my hammer and the whole business world looks like nails. What I love about this article is these authors explain to us how valuable it is to be able to swing that hammer. You probably still need other tools, but the truly great companies all focus on price.