From J.C. Penney under Ron Johnson and Pilgrims’ Pride Chicken under Lonnie Bo Pilgrim, to more recent cases of Ralph Lauren under Stefan Larsson or GoPro under Nick Woodman, CEOs seem to be particularly prone to tripping up when it comes to pricing decisions. Why? Here are 3 reasons.
1. Simple margin rules make bad pricing policy. Too often, firms have a plan for all products achieving a hurdle margin or better. At times, that hurdle margin might be quite high, above 60%. While having an overarching margin target might seem wise, it actually causes firms to either underprice some offerings, leaving money on the table, or overprice others, not allowing the money to reach the table in first place. Instead, companies need to understand the value of the benefits their offering delivers to customers compared to alternatives, and then price according to that value.
2. Revenue goals don’t deliver profits. Sales professionals, and many marketing professionals, are rewarded based on revenue. Whether it is a direct compensation package plan or an indirect “hero” goal, people in sales and marketing like selling and managing products that have big top-line numbers on them. But, a firm does not live off revenue, it lives off profits. While top-line numbers are great, profits and profit-based incentives are necessary for creating a sustainable firm. Instead, companies need to create profit-based incentives for their sales and marketing teams.
3. Not every potential customer is a good customer. Just because a person or business is a potential customer, that doesn’t mean the firm should serve that customer. Not everyone that could use the product is willing to pay for it. Companies should focus on serving customers that are willing to pay for the product, and require that they do pay.
Conversely, some CEOs have done well in pricing. Piaggio has done well with its strategic Vespa re-entry into India priced appropriately for the Indian market. Southwest Airlines did very well under Herb Kelleher in pricing and structuring flight service appropriately to compete with driving a car across Texas. And Google changed the game when it used a pay-per-click price structure that worked better on the web than typical competitors’ pay-per-eyeball.
What separates those that do well from those that don’t?
Their CEOs recognize that pricing is a problem that requires a flexible but still rules-based approach backed up by robust decision management. Business leaders who have succeeded with this approach to pricing solving pricing issues do the following 3 things:
- Engage sales, marketing, finance, and others in pricing policy decisions
- Utilize pricing experts to inform their decision, and
- Focus on the value the company delivers to customers
Pricing is not a one-and-done formula. It must be continually revisited based on the return received from the customer. Done right, pricing can continue to achieve maximum bottom-line value for your company.