Pricing is the most powerful of all of the marketing mix levers. Depending on gross margin, a 1 percent improvement in pricing can lead to a 10 percent increase in profitability. Yet, many companies don’t have a company-wide effort for price management. Sure, all companies have someone or some department who does pricing but very few truly understand and focus on pricing. Why? Let’s look at several explanations.
It’s not their business. Companies spend 99 percent of their time and energy trying to create value in the marketplace. They do this by designing and building high-quality, innovative products. They market and sell these products. They support their customers. Almost everything a company does either creates or destroys value and companies wisely focus on how to create more value. Pricing isn’t creating value, so it’s just not a focus.
They don’t realize the importance of price. This goes along with the previous reason. Invoicing doesn’t create value (but it can destroy it) yet companies realize that invoicing is important, otherwise they wouldn’t get paid and would go out of business. Pricing feels like tweaking invoicing. Invoicing is all or nothing. Pricing happens at the margin. Of course we know pricing is powerful and dramatically impacts profitability.
Pricing is hard. What a true statement that is. Even if a company decides pricing is important, they don’t know how to do it. They haven’t been taught it. There are so many complications. It’s so much easier to just use cost-plus pricing (or some other simple pricing rule) and not worry about it.
Pricing is political. It feels like every department in the company must have input on pricing. Obviously, whoever has profit and loss responsibility cares. Salespeople care a lot because it impacts their ability to sell and make quota. Finance people care because they are worried about the profitability of the company. Marketing cares because they are trying to drive revenue and price is a big factor. And of course, whoever is given responsibility for pricing cares. With everybody caring so much, price becomes a political football. Conflict erupts. No fun.
It’s no wonder firms don’t make pricing a priority. The question is do you really believe in the power of pricing? Do you really believe that a 1 percent improvement in price can lead to a 10 percent increase in profit? If you believe, then please answer one more question. What else could your company do that can increase profit by 10 percent?
My (obvious) recommendation: Focus on pricing.