Bringing Discipline to Pricing

Abstract

Different local market environments create quite different opportunities for pricing. You must understand these environments to set prices optimally. Many otherwise rigorously run companies are disconcertingly lax about pricing. Although a 1 percent improvement in price yields bigger gains in operating profit than a similar improvement in variable costs, fixed costs, or volumes--almost 8 percent on average across the SP in some cases, for instance, corporate pricing policies might have been poorly communicated to the branch sales force; in others, branches may have logistics, service delivery, or even local product-quality problems that are not within sales management's control. A new pricing process By grouping sales branches together in a meaningful way, a company takes the first step toward developing the ability to price its goods and services optimally. It can then plot the historical pricing transactions of sales branches in similar competitive environments, develop a way to reduce the variations between high and low pricing performers within each of them, and launch the new organization-wide pricing discipline (Exhibit 1). The first step in the new pricing process is to develop a supply-and-demand framework by understanding the supply-and-demand characteristics of a specific market or line of business. For some products, forecasting demand can be as simple as collecting information about the installed base and projecting the size of the market for add-ons. For other products, companies might have to weigh--singly or in combination--the influence on prices of such factors as population growth by age category or preferences, the growth rate of businesses of a certain size or type, and product-to-product migration patterns. Products too new to have histories can be compared with existing products, in similar market segments, that have similar characteristics. …