Companies are facing growing price pressure as competition stiffens, consumer confidence becomes more fragile and the Internet offers more transparency.
Organizations are having to reappraise the pricing of their goods and services, according to a report – “The power of pricing” – by PwC.
The report, which surveyed more than 500 companies around the world, lists some significant as well as surprising trends in how companies are going about setting prices.
Over 40% of the survey respondents believe pricing is the best way towards growing profitability.
However, barely a quarter (26%) of those interviewed think that rising prices will drive profits over the next 36 months, while 17% believe that profits and prices will both decline.
Getting pricing right is crucial
PwC partner, David Lancefield, said:
“Pricing is one of the main levers you can pull to make an impact on your bottom line. It’s especially important to get it right in a world in which investors and customers are more demanding than ever. Yet only 5% of respondents feature in the top quartile of all aspects of pricing performance.”
The report authors explain that 60% of companies surveyed adopt “the most basic approaches to setting prices”, such as pegging their prices to those of their competitors or applying a fixed mark up to costs.
Not that many companies adopt more sophisticated approaches, such as pricing based on a clients’ willingness to pay.
Senior PwC constultant, Nazanin Naini, said:
“The greatest challenge for companies is to understand where they generate real value and to reflect this in their pricing. Many companies claim to be customer centric, yet understanding what customers really value is one of the most commonly stated challenges, with only 13% of our survey respondents telling us they have deep insight into their customers’ willingness to pay.”
“Furthermore, we often see companies taking a scatter gun or uniform approach rather than, for example, setting prices in a way that rewards loyalty and customers generating high profitability, as opposed to those most costly to the business.”
Many companies ill-equipped for effective pricing strategies
Effective pricing strategy requires having proper systems and staff in place, something many companies appear to be unaware of.
Almost half of all the companies in the survey had no pricing team that could make well-researched recommendations on pricing. This results in companies giving their sales people more leeway on discounts from list prices, making it harder to meet profit targets.
“Our research suggests that the infrastructure to support smart pricing decisions is not fit for purpose. Almost half the respondents struggle to develop an IT infrastructure that supports pricing, whilst 37% struggle with governance and decision-making.”
“A poor pricing strategy can result in a loss of customers and a backlash from important stakeholders. When it’s done well, it’s the most powerful and effective way to achieve profitable growth.”