Are you one of these companies that leave money on the table because you don't charge the right price or make sure customers actually pay it?
According to the results captured in a new report, The Pricing Is Right: Lessons from Top Performing Consumer Companies by Bain & Company, 78% of respondents say their pricing decisions could be improved.
Across all industries, respondents identified a similar set of disruptive forces that are spurring them to action:
- new digital native competitors
- rapid share gain by low-price competitors
- insurgent premium niche brands
- the emergence of dynamic pricing
Bain & Company said it surveyed nearly 1,100 companies worldwide in a range of consumer industries, including retail, consumer packaged goods, telecom, restaurants, and hotels.
The firm said that the 15% of survey respondents that make excellent pricing decisions and increased their market share over past two years—reveals the capabilities in which they most clearly exceed the rest of the pack.
The consultancy company also evaluated more than 40 distinct pricing capabilities.
“Our research shows top performers are fanatical about perfecting the seemingly basic but actually difficult foundation of pricing, while starting to manage other cutting-edge capabilities at a level of sophistication that will help them widen their lead in the future,” said Ron Kermisch, co-head of Bain & Company’s global Pricing practice.
According to Kermisch, Bain’s statistical analysis indicates five capabilities that most closely predict top performance.
Connect the dots between value proposition and competitive price position. It might sound obvious, but many companies have gone astray in pricing because they don’t have a clearly defined value proposition, or the proposition does not align with what their target customers value, Kermisch pointed out.
Strong performers create a value proposition that not only lines up with their strategy but also flows through to product and pricing decisions, he said.
Tune the product mix to that value proposition. Given that most large and midsize consumer companies offer a range of products, they must translate their value proposition for different customer segments by calibrating the product mix and architecture, Kermisch advised.
Whatever the value proposition—premium, mass-market, value or other—the overall strategic price position of the business should flow through to tactics aligned with that proposition, he added.
Careful adjustment of the product portfolio allows companies to appeal to a broader range of customers, while protecting their margins on premium products, he noted.
Kill bad promotions, nurture the good ones. According to Kermisch, the following are key to promotions:
Leading companies tailor promotions for customer segments based on what they know about preferences and buying patterns.
They also analyze the volume, sales and margin effect of prior promotions, including the second- and third-order effects.
They carry out scientifically valid experiments with new variations on promotional tactics— what to promote, when, at what price point, framed in what way and with what marketing.
They clarify guidelines around the use of promotions and require formal approval before taking them to market.
Finally, they continually evaluate the role promotions play in their category and are ready to begin a careful, multiyear drawdown of promotional intensity when the facts warrant.
Shape price perception, not just reality. Most companies—luxury purveyors aside—want to be perceived by consumers as delivering greater value, relative to competitors, according to the company.
Some top performers thus take great pains to communicate and reinforce consumers’ price perceptions, said Kermisch, adding that the best companies have a clear sense of their key value items and categories as well as actively managing perceptions.
Lay the groundwork to price dynamically where it makes sense. Companies that excel in dynamic pricing have access to real-time data on changing market conditions, which inform fast decision-making processes to push out price changes quickly and easily, Kermisch pointed out.
They have the strategic clarity and discipline to determine when they should change prices and when it’s more important to provide a sense of stability to consumers, he said.
Dynamic pricing doesn’t make sense in every category or for every player today, but trends in the market suggest that all consumer businesses need to be getting ready to compete in a more dynamic pricing environment going forward, he added.