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::: PRICE: the focal point of customer relations
doing business by Chiara Merlini
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Pricing can be a
significant source
of profit for every
company in a
business area ...
The current
economic crisis
has obliged every
company to seriously review
its resources, scale economies
and customer relations.
The perennial focal point — and even more so
nowadays — is price, and therefore the correct
application of pricing (intended as the sum of
price manoeuvre techniques and strategies
enacted to increase profits) becomes fundamentally
important for the company.
A study made by the US McKinsey consultancy
company after analyzing data from 1200 of the
world’s leading companies concluded that
the most efficacious lever on trading profits
is price. The study showed that a 1% price increase leads to an 11% increase in profits
(whereas cutting the variable costs and the
fi xed costs by the same degree leads to 7.3%
and 2.7% growth in profi ts respectively).
Price is one powerful lever, in fact.
Using it wisely means much more than just
raising it, and means having a trained operative
staff capable of evaluating the parameters
on the basis of which decisions must be made
and tactics must be applied correctly, of which
latter there are many: (differentiating) levels
of offer, creating different versions of the same
product (versioning), grouping or separating
various elements in the same product/service
(bundling or unbundling), and fi ner customer
segmentation) in accordance with a clearly defined strategy.
::: THE OBJCTIVES OF PRICING
There are various short-term pricing objectives:
ensuring the company’s chances of
survival in the market, maximizing profits, or
obtaining a return on the investments made
thus far.
Prices can be modified in various ways: they
can be reduced to generate the cash-flow required
to cover a passing crisis; if the threat
posed by the competition is weak, there are
no reasons to vary the price range, and in this
case, the goal is to preserve the status quo,
whereas in the case of a price mark-up, product
quality can also play an important role.
::: PRICING STRATEGY
When planning a price (of a product or a
service), various factors must be considered
before choosing the approach that best suits
the company’s needs.
There are many approaches to pricing. The
main ones are: Premium Pricing, which sets
a high price wherever a high competitive
advantage is present (for suppliers of luxury
products and services, for example), whereas
in Penetration Pricing, the mark-up on the
prices of products and services is initially set
intentionally low in order to win shares of the market and then raised once this objective has
been reached.
With Economy Pricing, the price is set low because
the costs of selling and working are also
kept to a minimum.
Price Skimming consists in applying a high
price because there is a substantial competitive
advantage. The high price attracts new
competitors to the market, and then the price
inevitably drops due to the greater supply.
::: OTHER APPROACHES
Psychological Pricing: is used when the seller
wants the customer to respond emotionally
rather than rationally (setting a price of 99 instead
of 100 assumes significance from this
point of view); Product Line Pricing is the
price that is fixed wherever there is a range of
products or services and reflects the benefits
of proposing a package.
In Optional Product Pricing, companies try to increase the volume of customer purchases
once they’ve started buying. The “extra” optionals
are used to increase the price of the
product or the service (with airlines, a seat
near the window or a row of seats all together,
for example). Captive Product Pricing is when
the products have complements: after the customer’s
loyalty has been won, companies can
raise their prices by betting on these, whereas
in Product Bundle Pricing, the seller combines
many products in a single bundle in order to
move old stock. Promotional Pricing to push
the sale of a particular product is a widely
used lever. There are many examples of promotional
price approaches, such as BOGOF
(Buy One Get One Free), for example, used
primarily in the mass distribution channels,
not in niche markets.
Geographical Pricing indicates the setting of
clearly different prices in different parts of the
world that might be due to increases in shipping
costs, for example, or the fact that the
product is considered to have higher value
in one nation than in another. Value Pricing
is used where external factors like recession
or stronger competition drive companies to
attribute “value” to products and services in
order to maintain satisfying levels of sales.
 ::: WHAT THE EXPERTS SAY
The recent study by McKinsey shows that despite
the undoubted importance of the matter,
companies dedicate little attention to pricing,
much less to a detailed analysis. Pricing is the
finish line that is reached only after passing
through the utilization of resources, accurate
strategy and a precise application plan. This
requires a competent staff, setting clear objectives,
and being able to assess and manage
risk. Too many companies solve the problem
with insufficient investments, and then when
success occasionally arrives and the situation
momentarily improves, constant attention is
not maintained on the question over time,
and energy and resources are soon directed
elsewhere, with the result that the effective
impact of investments on price management
decreases, and the efforts made are far from
the fullest development of their potential.
::: WINNING POLICY
What do the successful companies do?
They build a solid internal structure that underlies underlies
and supports the excellence of their
prices. They start by concentrating on the
most critical pricing processes, and then
consider who owns and guides the pricing
profit centers; constant attention to performance
management stimulates managers to
improve their performance in the context of
their global business strategy.
Last but not least, they use appropriate systems
and instruments to facilitate the price
determination processes that provide the organization
with support a help increase the
level of managerial performance.
On the other hand, there are companies who
lack the bases to construct correct pricing
management because the infrastructure that
should bring this policy to success is lacking:
choices are made on a basis that might be
defined as emotional and reactive rather than
as the results of a process centered on precise
rules and tools.
::: WHO FOCUSES ON PRICING?
Structuring an adequate pricing infrastructure
requires an efficient staff. This is enabled by an
accurate selection of the skills and qualifications
of company personnel.
The Pricing Director should be responsible
for coordinating the implementation of the
price fixing methods, offering advice to sales
managers and staff in the use of formal pricesetting
methods, and checking up on the
impact of pricing measures and strategies.
He or she should be responsible not only for
the management of pricing activities day by
day, but also for promoting a proactive approach
(the anticipated perception of trends
and changes in order to plan the measures
required in time), and therefore an ongoing
improvement in mental attitude, which
is what makes the real difference between
high-performance organizations and merely
good organizations.
The experts also advise separating people assigned
to price definition and management
from any other resource responsible for negotiating
prices with clients.
This division creates a healthy tension between
the two groups that is hard to preserve
when price management is instead assigned
to the sales teams.
Lastly – because it’s something that all highlyefficient
organizations do – the general conditions of health and performance should be
regularly assessed, and this monitoring should
also be extended to pricing.
::: MANAGEMENT INSTRUMENTS
Every company today should have a set of
systems that measures the financial and operative
health of its prices at every company
level: systems that can contain simple data,
such as the average sales price, the discount,
and the profit margin for key products; operative
data, which include the number of pricing
exceptions and the percentages of gains
and losses, and special measures to monitor
the progress and impact of pricing activities.
These parameters should be linked to financial
incentives, without such linkage most of
the measures taken risk becoming irrelevant.
It is also important to set up a balanced incentive
plan.
Non-monetary incentives (obviously in addition
to monetary incentives) can be extremely
useful: one of the most simple and the most
effective is the public positing of sales staff
performance in terms of discount or margin.
This appeals to the salesman’s innate sense
of competitiveness and creates a healthy internal
dynamic.
::: COMMUNICATION IS ALWAYS IMPORTANT
One fi nal component of performance management
is the use of assessment measurements
as the basis of the dialogue conducted
to improve performance. Adopted with care
and regularity, this type of coaching becomes
a powerful tool. It has been demonstrated, in
fact, that in order to obtain greater impact,
talk about price/performance must consider
three characteristics: regularity over time
(weekly or monthly), the involvement of all
the different levels of the pricing organization
and the coverage of a clearly specific aggregate
of subjects.
::: PRICING METHODS AND INSTRUMENTS
Obtaining excellent results from pricing requires
investments to both collect accurate
and up-to-date data and then transform them
into useful information.
The difficulty lies in the fact that many companies
fail to understand why they should make
investments in this field or spend more than
they already do on complex systems that are not expressly suited to their needs.
First of all, a company needs to know what information
it needs and when it needs to have
it (there’s no fixed rule for everyone, and the
panorama changes greatly from one business
area to the next) and must therefore never act
too precipitously because the company’s real
needs in this case are better understood with
the passage of time.
The systems and instruments usually serve to
provide this type of support in making pricing
decisions and conducting negotiations, in
making the analyses that identify the opportunities
for price improvement, in monitoring
all the different types of performance in progress,
and in keeping track of price activities.
Metrics, dashboards, and reports should offer
managers an overall view that helps them
as they monitor every aspect of price performance
in the business area under their supervision
and shows them where and how to
intervene when necessary.
::: GETTING THE FIGURES AND KNOWING HOW TO USE THEM
The final challenge lies in storing all the relevant
data in a centralized repository. Information
on costs and sales can often be found
scattered throughout various IT systems and
in different company offi ces and departments,
but in order to achieve satisfying results, all
these data must be grouped in one place.
Many companies adopt a data warehouse approach:
data coming from different IT systems
(which must be, above all, reliable!) are
regularly loaded into a single
database of large dimensions
that is updated
at specific intervals.
In conclusion,
the entire pricing
structure
can become a
source of significant profit
for a business
when its underlying
foundation
makes use of the
correct processes, an
effi cient organization, and
adequate management of performance,
systems and tools.
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