Many brand owners failing on pricing policy

24 August 2010

NEW YORK: Most major brand owners are failing to set, coordinate and measure the results of their pricing strategies effectively, a new report has argued.

McKinsey, the consultancy, stated in a study that increasing prices by 1% typically delivers in an 8.7% uptick in operating profit for a corporation in the Global 1,200.

Moreover, businesses adopting best practice procedures can charge a 2-4% premium on previous levels, equivalent to 15-25% of earnings in the long term.

Existing options like "pocket-price waterfalls", "price bands" and "value maps" have an established pedigree, but even these possibilities are regularly ignored.

"Too many companies try to get by with minimal investments in their pricing infrastructure, grabbing quick hits ... then declaring victory and focusing time, energy, and talent elsewhere," McKinsey said.

"The result is that the actual impact of pricing-infrastructure investments diminishes over time, with such efforts falling far short of their full potential."

Priorities will differ by industry, from chemical firms monitoring supply and demand to consumer electronics manufacturers employing focus groups to discover what shoppers might pay.

However, it is always important to identify who "owns" this sphere, and thus takes decisions and anticipates change, rather than relying on random and reactive schemes.

"Too many companies try to get by with an ad hoc or management-by-committee approach, with no clear owner; a process emerges only when absolutely necessary," McKinsey said.

"Others believe that full-time pricing personnel are not required and that responsibilities can be spread across staff in areas such as sales, marketing, and product management."

Forming a dedicated unit handling these tasks is crucial, as it reflects the significance of this issue to every enterprise and fulfils additional key functions.

Ideation and implementation, rolling out consistent methods, embeds pricing into corporate culture and educating sales departments are among the core duties which should command attention.

McKinsey suggested this team must be separate from its counterpart interacting directly with customers to create a "healthy tension between price negotiators and price managers".

Although promotions and discounts have been primary features of the recession, McKinsey asserted that in-depth analysis remains very much the exception.

"Many companies today have neither accurate measures of pricing performance nor meaningful rewards for executives who make decisions on pricing," its study argued.

"That reduces the incentive to stretch for small pricing improvements, which as we noted above can translate into huge improvements in earnings."

All firms could benefit by building "bid desks" evaluating requests to adapt policies either for a fixed time or on a permanent basis, and appraise the upshot of these efforts.

Setting clear metrics is also essential, starting with simple, but crucial, data covering average selling price, reductions and margins on products.

Further information encompasses the proportion of goods available outside the usual cost parameters, "win-loss" percentages and assess individual initiatives.

A dashboard should be available assisting brand managers determining current effectiveness, while giving more senior executives access to comparative statistics from across an organisation's portfolio.

Collating the figures that are indispensable when making decisions, conducting negotiations, undertaking analysis and scrutinising outcomes in a centralised database similarly helps gain a true picture of the climate.

"First, understand what information you need and when you need it, and second, move slowly because real business needs for systems and tools are best understood over time," McKinsey concluded.

"There is no one-size-fits-all answer."

Data sourced from McKinsey; additional content by Warc staff