The power of pricing: How to make an impact on the bottom line

"More than 40% of respondents rank 'more effective price structuring' as their first or second choice strategy for increasing profitability"

"15% of respondents believe that price pressures will lead to falling margins"

"Nearly 60% of respondents said that their pricing approach included simple rules such as cost mark-up or matching competitors "

"Less than 5% of respondents score in the top quartile for all four aspects of pricing"

"25% of respondents have little or no understanding of what their customers value"

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Pricing matters. A 1% price increase typically delivers an 11% impact on profit. So in a volatile and competitive market, it is more important than ever to give pricing the attention and focus it deserves.

We asked pricing specialists from over 500 companies from around the world about pricing as part of their business strategy and how they currently approach it. The results show significant trends in pricing capabilities and practices between different industries and countries, and highlight a number of opportunities for further improvement.

Implementing a great pricing strategy can be complex and involves excellence in all four aspects of pricing. But when taken seriously, with a clear strategy in place, pricing can help make your company more profitable now and in the future.

Pricing for growth

Every company's growth potential and journey is different. We believe that some approaches are much more effective than others to navigating towards two outcomes: profitable growth now for your business and a better 'growth fitness' that will allow you to identify and capture future growth opportunities. Our survey focuses on pricing, one of the most powerful and effective ways to achieve profitable and sustainable growth.

What are the challenges of pricing for growth?

There are a number of challenges for businesses when setting or changing their pricing strategy. These include having a clear picture of the true profitability of customers and products, ensuring consistent management of information and making sure data exists in a form that can help companies make good pricing decisions, in a timely and up-to-date manner and knowing what your customers value.

What are the leading companies doing?

It is clear from our findings that very few companies 'strongly' adopt one pricing strategy or another. Most look to match competitors' prices, whilst some price the benefits to the customer. Our analysis suggests that the more infrequently that companies can, or do make adjustments to prices, then the greater the impact will be of any pricing decisions. We also found that optimising pricing does not always come down to simply increasing or reducing prices. Often changes in product/service features, the marketing strategy or channel focus is the main way of improving performance, such as low cost airlines pricing luggage separately from the cost of the fare.

The four aspects of effective pricing

Looking at pricing in a structured way simplifies a complex subject and reveals opportunities for improvement. In our experience, working with companies across a range of industries, there are four aspects of pricing that are particularly useful to consider:

  • Industry: We looked at the frequency with which companies are tracking key industry trends and competitor activity and the responses show that companies are better at analysing historical data rather than future trends.
  • Customer: The deeper the businesses' understanding of what its customers value, the greater the opportunity to optimise pricing. The most advanced companies now use behavioural insights to drive a more sophisticated understanding of customers' response to price and can therefore improve pricing dynamically over time.
  • Transaction: If a business doesn't have the means or the inclination to deal at a transactional level, then any pricing strategy runs the risk of neither rewarding the good or penalising the bad. A business needs sufficiently granular data to understand who is contributing what in order to optimise pricing and target its pricing strategies effectively.
  • Operations: Companies often underestimate the importance of having clear responsibilities and alignment across people, functions and the supporting systems. Good pricing governance is key to effective pricing and requires clear decision rights and approval mechanisms as well as accurate and timely data.
 

Video: Why pricing matters

Nazanin Naini speaks with Consulting partners David Lancefield and Mike Greig about the latest findings from the Global Pricing Report and how you can use pricing as a powerful tool to make an impact on your bottom line

 

Transcript

Pricing survey report - meeting notes

Hi I’m Naz Naini; a senior consultant in PwC’s pricing team. I’m joined here today by Consulting partners Mike Greig and David Lancefield, to talk about the key findings from our 2013 Global Pricing survey.

David, perhaps you could start by talking us through a little bit about the background to the survey?

Sure Naz. So our experience of working with organisations around the world tells us that pricing has a big, big impact on the bottom line. However we also see and observe that actually many organisations don’t spend enough time or enough attention on pricing as a growth leaver when you compare it to say, looking at innovation, digital or other aspects of customer impact. So we wanted to use this survey to, if you like, look at some great practice and perhaps some other practices that are not so good, across a range of organisations around the world, if you like, to give some stimulus to our clients and indeed some challenge in terms of how to use pricing more effectively when they’re considering profitable growth.

So from your perspective, what would you say the most significant findings from the survey have been?

I think I always look for sort of surprising results or inconsistencies and I’ll draw out perhaps two. The first is, on the one hand the respondents told us that pricing is their first or second choice when they look at how to drive profitable growth when you compare it to say, cost reduction, innovation or better customer experience. The flipside being 60% told us that actually they only set prices in relation to costs, or matching competitors, they don’t for example spend enough time on looking at customer willingness to pay, even though they may say they’re the most customer centric organisations around. So it’s a bit of discrepancy between those two facts. The second finding also is that many organisations say they are joined up when they set prices, however only 50% say they have some form of pricing board or committee to bring those decisions across the organisation into one, which suggests there some areas of improvement in order to make pricing decisions that enhance the whole value of the organisation rather than just one part.

That is very interesting David, thank you. So Mike, clearly as David has pointed out, pricing is very important for companies looking to grow and to do so whilst retaining or increasing the customer base. But from what you’ve seen of the results, what would you say are the most strategic challenges that businesses face?

That’s a good question. From my point of view a 1% increase in pricing typically drops about 11% in terms of increase in profit and I suppose companies can use that as a strategic tool to really improve their profitable growth. But I think that there’s some nervousness out there, obviously around public perception on increasing prices and also the reaction of customers, which tends to put companies off. I think the real challenge is to understand where the companies are generating real value and to affect the prices by focussing in on those particular areas, rather than just using pricing as a blunt tool.

So clearly it’s not as straightforward as it might seem at first. So what would you say the most successful companies are doing?

Well it’s really interesting, we looked across four areas in pricing perspectives and in terms of the companies, only 5% were really doing well in all four. We looked at the industry and how they were comparing with others in their industry, customer - how they were doing with their customers, operations and their transactional approach. I think the transactional approach really stood out for me because what it said was really companies didn’t understand their true cost to serve across the customer base and many companies were taking a scatter gun or uniform approach to that. And I guess the challenge for me in looking at that, is there’s a great opportunity to look more closely at the companies where we could change pricing to reward loyalty and the customers that are really generating high profitability vs. those that are really causing a lot of disruption or maybe a high cost to serve to the business.

Thank you Mike. David, clearly the opportunities for companies are enormous, but many struggle to execute. So from what you’ve seen, what would you say the key takeaways from the survey are for companies looking to deliver excellent pricing strategies?

I think the survey and our experience tells us that there are opportunities across the whole organisation to improve different aspects of pricing to deliver profitable growth. A simple message is – take a fresh look at pricing – often its relegated to only looking at product launches or tactical activities, but actually looking at pricing holistically across from strategy all the way through to implementation, can have a big impact on the bottom line and we’d encourage companies to look whether it’s around the decisions they take, what they said in the overall corporate strategy, whether it’s the information they used to make those decisions, or indeed the governance, there are opportunities everywhere and I guess we hope this survey has provided some stimulus and hopefully some challenge also to how they’re going about it.

There is a lot to think about. Thank you both for sharing your insights on the result of the survey. So it’s clear that the survey suggests that there are lots of great opportunities for pricing to make a difference and how successful businesses are, how they grow and how they do that profitably, but there are also some common challenges, both in developing and implementing great pricing strategies. To find out more or to speak to one of the pricing team, please get in touch.