Thursday, July 11, 2013

Pricing is the Domain of Successful CEOs - By Kevin Mitchell

Most companies underprice their products and services, and in doing so lose out on large chunks of potential profitability. Pricing decisions are often emotional and subjective. Many sales bonuses are tied to revenue, not profit, and more often than not sales executives push back on price increases that usually reduce volume. Marketing executives also occasionally express concern on price increases because it can reduce market share.  And operating executives are concerned with excessive inventory in the event that a price increase goes badly.

More often than not, risk-averse companies play it safe when it comes to pushing through price increases, which is why the CEO needs to get involved in pricing decisions. Specifically, the CEO needs to mitigate the risk to specific departments and careers if the decision turns out poorly.

A major study last year of some 2700 executives and managers from 50 countries by Simon-Kucher & Partners shows profits increase when C-level executives take an active leadership role in pricing. If a C-level executive is involved in pricing, the company is much more likely to have a pricing organization. This high-level commitment significantly boosts a company’s pricing power.

“Staying in a pricing ‘comfort zone’ is no longer an option for C-level executives in the current economic climate,” said Georg Tacke, CEO of Simon-Kucher & Partners. “It's a leadership obligation for the executives, not a day-to-day operational one.”

The Simon-Kucher study showed that companies whose C-level executives took an active role in pricing are 35% more likely to have high pricing power, and 30% more likely to expect strong EBITDA growth over the next three years. Pricing power is the ability of a company to get the prices it deserves for the value it delivers to customers.
 “Pricing power begins at the top of the organization,” said Tacke. “When C-level executives turn their attention to pricing, their companies are more likely to have a stronger profit outlook, more likely to raise prices, and more likely to make those price increases stick.”

While it is crucial for a company’s profit to have this kind of C-suite involvement, pricing is not the only job of the CEO.  But, by putting pricing on top management’s agenda, organizations are more likely to have a dedicated pricing role or function that ensures strategic pricing decisions are implemented C-level involvement in pricing means setting the right objectives and incentives, driving the organizational and cultural changes to support better pricing, and taking more responsibility for pricing strategy as a whole. It also means the company allocates additional resources to pricing decisions, and that pricers or executives tasked with pricing are able to obtain the tools and expertise needed to assess pricing changes and ultimately boost the company’s pricing power.

The payout for a higher price point is undisputable, as even a 1% increase in pricing can mean a 25% or higher impact on the bottom line. This commitment also gives companies their greatest chance to survive and thrive in today’s low-growth climate. And, with more than 80% of companies facing increased pricing pressure from customers or competitors, this pricing power advantage is more important than ever.

Companies with active C-level involvement in pricing are 18% more likely to put through a successful price increase, according to the study. But more importantly, they are 26% more likely to get higher margins from their price increases than companies without C-level involvement in pricing. That means creating a dedicated pricing organization that can provide end-to-end coordination, from strategy to analytics, to interpretation and implementation.

With the evolution of big data and predictive analysis, the science of pricing has come a long way in a few short years. Companies have become more sophisticated in their ability to optimize pricing across a wide assortment of regional and functional silos.

However, as the Simon-Kucher study shows, unless a CEO gets involved to provide top-down pricing leadership, drive the decision making, accept responsibility for risk and arbitrate intra-department rivalries, optimizing prices and profits will be left up to chance in an ill-defined game of outcomes.
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Kevin Mitchell is the president of the Professional Pricing Society. The Pricing Society is the world's largest professional society dedicated solely to pricing training and education. The organization provides pricing professionals with current strategies, market trends, analysis, research and resources from today's leading pricing experts and technology. For more information on membership or events visit the organization’s website at