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The price of pricing effectiveness
Is the view worth the climb?
Great companies do pricing very well. Whether these companies simply have more sophisticated pricing capabilities, or pricing prowess has bolstered their performance, the link between pricing and profitability recurs both anecdotally and in more detailed analysis.
As companies seek ways to increase profit margins and improve overall business performance, business leaders are increasingly turning to pricing as a discipline that can boost their bottom lines. A search of publicly available data reveals a significant number of blue-chip companies that acknowledge pricing improvement as a part of their earnings success. Yet many seem to make little progress in driving the kind of consistent pricing discipline that yields the results they need.
This dichotomy in the corporate world suggests several questions:
- What is the value of investing in pricing improvement?
- Is there a difference, attributable to pricing capabilities, between companies that expend significant effort to address pricing and those that do not?
- What does it mean to be good at pricing? Can’t we just raise our prices and see if our sales force can make them stick?
- What are the risks of embracing and investing in pricing improvement, and how can these be managed?
These are important questions in the face of many competing priorities and a challenging economic environment. However, a broad study of company performance and pricing reveals that, regardless of industry, geography or size, companies with effective pricing capabilities significantly outperformed industry peers across multiple financial metrics, including net margin, market valuation, return on assets and return on equity.
This suggests a correlation worth exploring. Intriguingly, even the diverse population of companies studied has identifiable commonalities in the capabilities they have built. These commonalities, as well as identifiable strategies and the risks the companies faced in building pricing capabilities, are worth a closer look.