Pricing in the new normal - Driving growth in a stagnant economy
• Pricing is a key growth and profit lever in the current economic environment
• Most businesses are yet to achieve pricing excellence
• Taking different perspectives on pricing
highlights significant opportunities
• Pricing excellence requires senior management commitment
Published on: Mar 4, 2016
Transcripts - Pricing in the new normal - Driving growth in a stagnant economy
pwc.com/strategyPricing in the‘new normal’Driving growth in astagnant economy
Pricing is a key growth and profit lever in the ‘new normal’In summary: The ‘new normal’ is characterised by low growth, high inflation• Pricing is a key growth and volatility and profit lever in the The ‘new normal’ is forecast as a prolonged period of disappointing GDP and current economic consumer spending growth in western economies, lasting into mid mid-2010s. environment There will be periodic bursts of inflation, driven by energy and commodity price movements, adding to growth volatility. Prices for energy and other• Most businesses are yet to natural resources are expected to be high, and financial market volatility is achieve pricing excellence forecast to continue.• Taking different Volume growth is hard to achieve and cost reduction opportunities perspectives on pricing have been largely exhausted highlights significant Before the financial crisis, helpful tailwinds meant economic growth could be opportunities taken for granted which is no longer the case. Driving growth through M&A• Pricing excellence requires is an option, but getting deals done is not straightforward given economic senior management uncertainties. commitment In developed economies, most companies have largely exhausted cost reduction opportunities. Price pressure and volatility are increasing Price pressure is increasing; consumer confidence and spending continues to be depressed and price transparency is increasing, whilst companies are focussing more on optimising procurement. Increased volatility of both demand and costs is making pricing, and forecasting and managing profit, increasingly challenging. Pricing is a key profit lever In this ‘new normal’ economic environment of low volume growth, rising price pressure and greater volatility, achieving pricing excellence is a key source of competitive advantage. Unlike other levers, such as growing volume or reducing operating costs, pricing changes fall directly to the bottom line, with a 1% price increase on average delivering an 8% impact on profit. Even small improvements can have a material financial impact and are worth pursuing. The power of pricing 8% 6% Increase in profit 4% 2% 1% change 1% change 1% change 1% change in volume in fixed cost in variable cost in selling price Source: PwC analysis
Most business have not fully tapped their pricingpotentialMost businesses fail to optimise pricingWhilst pricing is a key profit lever, most businesses fail to fully realise Pricing excellencetheir pricing potential. In our experience, this is due to a multitude of requires making afactors: trade-off between price, volume and• Quantifying the benefits from pricing changes is harder than for profit. It is achieved operational changes and requires considerable judgement by having a deep• Identifying pricing opportunities is an analytical task and often understanding of requires external market/customer information which can be customer value overwhelming for many business to collect and then analyse drivers, and facilitating the• Pricing has a market impact and can change customer and organisation to competitor behaviour and is therefore seen as high risk deliver what• Realising benefits from pricing insights can be multi multi-disciplinary customers want, at a involving changes in sales and marketing, product development and price that they are even strategy willingly pay• Companies see their markets as competitive with little or no room to increase prices• Pricing is considered to be tactical and not strategic and receives little focus• Often there is no clear accountability for pricing and it therefore does not receive the same focus as say operations, finance or IT which are competency areas or cost centres in most organisationsSub-optimal pricing has a negative impact on performance optimalDue to sub-optimal pricing, many companies inadvertently: optimal• Set prices based on cost plus or competitor prices rather than the value customers perceive• Price to maximise sales and/or volume rather than profit• Provide rebates or marketing incentives that are not commensurate with the volume of business received• Do not capture opportunities to increase prices due to market changes• Over discount or discount at the wrong time• Undercharge given the benefits customers’ receive relative to alternatives• Invest in products/services that are thought to be margin additive but which are margin dilutive
Pricing excellence requires taking differentperspectives and senior management commitmentConsidering pricing from different perspectives highlights significant opportunitiesConsidering pricing from different perspectives simplifies a complex subject and unearths opportunities.In our experience working with companies across a range of industries, there are four perspectives thatare particularly useful to consider: Industry lens Customer lens Industry level trends such as changes in Individual customers attach differing the supply and demand balance in a levels of value to different market or cost changes, impact product/service benefits. Deeply different industries to different degrees. understanding these value associations, However in all cases, a forward how demand changes with price looking understanding of how an changes, and how to position offerings industry is changing is an important versus competitors, is a core consideration in pricing, particularly competency in achieving pricing in the current volatile markets excellence Operations lens Transaction lens Realising the benefits from changes in Understanding prices achieved on a pricing requires alignment across transaction by transaction basis, functions, with clear responsibilities for across customers, products and price setting, the right organisational channels is critical. Knowing the true structure and incentives, as well as the cost to serve, whether discounts are tools, technology and processes to commensurate with purchase volumes support pricing objectives and monitor and if rebates are justified, requires performance granular analytical insight and financial rigourSustainable pricing excellence requires senior management commitmentUsing pricing to improve profitability does not always come down to simply increasing prices. Oftenchanges in product/service features, marketing strategy, channel focus or the pricing basis, for exampleairlines deciding to price for luggage separately, are the key levers to improving performance.Consequently, effecting the required changes and achieving sustainable pricing excellence requires seniormanagement attention and commitment.Has your business fully tapped its pricing potential? Can you answer ‘yes’ to the questions overleaf?
Have you fully tapped your pricing potential?Pricing checklistCustomer Yes Somewhat No1. We have a clear approach to segmenting our customers based on a deep understanding of their needs, and frequently update the segmentation2. We really understand what product / service benefits each customer segment is prepared to pay for, and how much they are willing to pay3. We frequently use insights from customer segmentation analysis to review our pricing decisions4. We set prices based on the value our products / services provide to customers and not on a cost-plus or competitor benchmarking basisIndustry5. We track key industry factors influencing our pricing decisions (e.g. supply / demand trends, cost trends, regulatory changes, etc.)6. We track competitor prices and have a fact-based approach to understand pricing based trends in the near, medium and long term7. We always consider pricing implications of our key business decisions (e.g. investment in new capacity, M&A)Transactions8. We monitor prices we charge at a transaction by transaction / order by order level, on a weekly / monthly basis9. We are confident that we achieve the maximum possible price on every transaction10. We have a clear understanding of the true cost to serve for each transactionOperations11. Senior management has accountability for and is involved in pricing decisions12. Our sales & marketing teams incentives are aligned to our pricing objectives13. We have a clearly defined and limited discounting authority, and the rules are rigorously enforced14. We track the appropriate key performance indicators on a timely basis to inform pricing decisions at different levels of our organisation
Case study - establishing the potential for price increasesduring an acquisitionThe context Importance of Performance of KPC suppliers against KPCsOur client was in the process of acquiring an Key purchase criteria (0 = not important; (0 = poor;10 = perfect) (KPC) 10 = of criticalindustrial products business. It was suspected importance) Supplier 1 Supplier 2that potential existed to improve profitability Product characteristics 10 10 9through increasing prices and our client needed Product portfolio 6 7 7an estimate of the potential to include in their Delivery time 9 8 8valuation model. Knowledge & training 8 10 8PwC approach Service & support 8 9 7 Level of innovation Higher 6 10 8 perceivedIn conjunction with the target company’s Brand 3 price 8 5management, we developed an interview Business relationship 5 9 7programme to investigate customers’ Weighted average perceived benefit rating 9.0 7.7 perceived pricewillingness to pay. We undertook customers Distributor (Indexed) perceived benefit rating (Supplier 100 85 Supplier 1interviews with a cross section of different 1 = 100) Supplier 2customer segments to establish customers’perceptions of price and value of the target’sproducts and its competitors offerings. Key: Direction of arrow indicates evolution ofOutcome Lower competitive position perceived priceOur work highlighted significant potential for Lower Distributor Higher perceived perceivedprice improvement in two customer segments. benefit perceived benefit benefitAuthors Barry Jaber James Oram Neil Hampson Director Director Partner T: +44 (0) 20 721 31567 T: +44 (0) 20 721 23782 T: +44 (0) 20 7804 9405 E: email@example.com E: firstname.lastname@example.org E: email@example.com/strategyThis publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You advshould not act upon the information contained in this publication without obtaining specific professional advice. No representation or represenwarranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the aextent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability,responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information incontained in this publication or for any decision based on it.© 2012 PricewaterhouseCoopers LLP. All rights reserved. In this document, "PwC" refers to PricewaterhouseCoopers LLP (a limited limitliability partnership in the United Kingdom), which is a member firm of PricewaterhouseCoopers International Limited, each member mefirm of which is a separate legal entity.