Survey shows pricing is an untapped profit lever

Many organisations can boost performance with proper pricing management. By Tony Hodgson, head of the pricing and revenue management practice, the Bellis-Jones Hill Group.

Tony Hodgson

According to research by McKinsey, for the average company a well-placed 1 per cent price change typically results in a 12% change in net profit.

A survey by my company has shown that, while most companies recognise the strategic importance of pricing and its impact on the bottom line, few have coordinated strategies.

Instead they have tended to focus on the often more difficult task of cost reduction to improve profitability. Shifting some focus to the top line could significantly benefit many companies. By our calculations, getting your pricing policy right could mean a net bottom line margin improvement of between 2 and 5 per cent.

Visibility and recognition

In our survey we asked more than 40 leading organisations to assess their strengths and weaknesses in pricing.

In 67% of cases, respondents felt senior management recognised the importance of pricing to organisational growth and profitability. They also believed managers had a clear vision about pricing strategies and processes.

However, these findings contrasted sharply with other responses. Of the companies surveyed, 54% could not accurately measure the impact of discounts, rebates, extended terms, or free delivery on their profits. Although organisations spent much time and effort analysing costs, they lacked awareness of how poor pricing could affect revenue.

Performance analysis

Only 37% of companies could easily analyse and compare the net prices paid across their customer base. If companies cannot access this information, they do not have control of their pricing processes. Apart from the potential impact on profits, they could be accused of unfair pricing practices if big variations in prices were discovered for customers with similar business profiles.
 
More than half the organisations surveyed had no systematic way of collecting competitor pricing information. This can lead to price wars as one-off pricing actions by the competition can be misinterpreted and lead to inappropriate action.

When setting prices it is important to understand the impact of price changes on volumes. Only 12% of respondents understood the price sensitivity of their products and services. Companies who cannot estimate this are often reluctant to make changes and remain market price followers rather than leaders.
 
Of the sample, 62% had a formal discounting structure. These are designed to give them the right level of control. But only 35 per cent reported that their discounting structures were used in most pricing decisions. This could be for a number of reasons:

• the pricing policy is out of line with the market
• there is lack of alignment between marketing (or those who set the prices) and sales
• there is no real control over price setting in the organisation.

One of the most surprising results was that only 11% of organisations agreed that their sales force incentive scheme was aligned to their pricing strategies and objectives.
 
Only 33% of organisations could measure the performance of contracts to supply goods or services. This means they could not take action when customers did not take up the promised volumes on which the discounted prices in these contracts had been agreed. Companies can improve their bottom line profits by implementing simple contract management processes. 

Pricing and revenue management strategy

Only 22% of organisations felt their pricing strategies were aligned with other elements of the marketing mix. This can be a costly problem. If marketing spend has been focused on promoting the value of the product and investments made to deliver market leading service, it’s no good pitching prices just to match or beat the competition. This not only reduces potential revenue but can send a mixed message about the product to the market and makes customers suspicious about its quality.
 
Only 22% said that responsibility in the organisation for managing pricing was clear and that the role was properly resourced. As stated above, this supports our experience that while most companies recognise the strategic importance of pricing and its impact on the bottom line, few have coordinated strategies.

The pricing process crosses all functions and in many cases no one group has ultimate responsibility. Consequently there are usually many untapped opportunities for improvement.

Assess your company online

Complete the survey to find out your company’s strengths and weaknesses in pricing. You can also choose to receive a benchmark report of your results.

Case study - logistics firm gets a pricing health check

We recently worked with a client in the logistics industry. The client understood the importance of price to its profitability. It had completed some work in this area but still wanted an external review to find out if there was room for improvement.

We used our ‘pricing and revenue management health check’ to review the organisation’s capabilities in the eight key areas that support effective pricing:

• pricing strategy
• costs to serve
• customer value
• price sensitivity
• organisation, skills and resources
• competitive intelligence
• deal and price management processes
• tools and systems.

These were the results:

• several changes, none of which required investment, were identified in the administration process - just one of these boosted profits by £1m
• savings were identified in sales, administration and billing by the deployment of pricing structures that automatically adjust with changes in customer profiles
• we suggested changes to costing to allow the organisation to change its pricing policy and confidently grow revenues in new profitable market segments
• the need for enhanced tools to support pricing management was identified and fed into IT developments plans.

December 2006