The issue of ownership is not the only thing preventing companies from achieving great pricing results. There are emotions at play too and fear or overconfidence are often to blame for poor pricing decisions.
The issue of organisational ownership is not the only thing preventing companies from achieving great pricing results.
Fear, overconfidence and incentives are often at the root of poor pricing decisions.
The most common lament I hear from senior management on pricing is that they are price takers not price makers: “We don’t have control of our pricing – the market does” they say. I don’t agree with that for the most part but it is this fear of the unknown and the consequent lack of proactive action that Dan Ng explores.
The solution is simple: companies should invest in their pricing capability and arm themselves with data and insight to make pricing decisions with confidence even if, for example, all the bargaining power is in the hands of their customers.
That lack of insight and information can also have the opposite effect, breeding overconfidence as Edoardo Poli describes.
Companies must guard against the mistaken belief that sticking a price tag on a product is a simple task. Setting prices based on a mix of intuition and anecdote is a dangerous but common practice as he points out. In almost every impediment to effective pricing is a failure to harness data and make properly informed decisions.
Looking at incentives Ben Gaster argues that companies must look again at the sales team’s goals and incentives in order to ensure they are making the best pricing decisions for the wider organisation and not leaving margins behind.
I would also suggest that most companies need to really test the relationship between price and volume. All too often I see companies chasing volume by cutting prices by 10% and even 20% and not getting the expected volume uplift.
Companies should only take these actions once they have a full understanding, for instance, of the precise relationship between price and demand in the mind of their customers but also how competitors are likely to react to their pricing actions.
Companies can only gain this kind of insight if they build a pricing capability and, to their credit, almost all big firms have made some effort. Where they fall short in my experience is in not thinking about how to make that capability sustainable – to build a permanent capability that can be successful both internally and externally.
If pricing is tackled as a project – perhaps focused on a specific product, category or country – it invariably fades away as easy wins are exhausted, key personnel move on or departments get stuck on key decisions. Even if the project is successful, it is a one-off and momentum is lost.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.
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