In his keynote at this year’s Manufacturing Finance Summit, Dr Peter Colman – a partner at the global pricing strategy consultancy, Simon-Kucher & Partners – explained the importance of getting pricing right.
Following a day of roundtable conversations, Dr Peter Colman took to the stage to deliver his Manufacturing Finance Summit 2018 keynote.
Pricing power is the single most important business lever, according to Dr Colman, who kicked his presentation off with a quote from business magnate, Warren Buffett:
“If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. But if you have to have to prayer session before raising the price by 10%, then you’ve got a terrible business.”
Many companies want to raise prices, but most struggle, noted Dr Colman. Currently, businesses typically achieve little more than a third (37%) of the price increases they seek on average, i.e. trying to raise the price of a product by 5%, but achieving just 1.9%.
He commented: “That is the lowest realisation rate we have ever measured in our Global Pricing Studies. In 2012, companies achieved 50% of their planned price increases, on average.
Dr Peter Colman is a discussion leader at this year’s Manufacturing Finance Summit.
This one-day event will convene a select group of manufacturing leaders to collaborate and develop strategies for growth and investment, and to prepare for the impact of global trade factors like Brexit.
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Value creation vs value extraction
According to Dr Colman, most companies are better at value creation than value extraction: “Pricing often comes down to guesswork. Too few people know how to quantify value, articulate it and determine a price accordingly.”
That’s disastrous, he warned, as price is the stronger profit driver a business has in its arsenal. Data from Simon-Kucher & Partners shows that a:
- 5% improvement in variable cost results in a 13% improvement in operating income
- 5% improvement in fixed cost results in a 15% improvement in operating income
- 5% improvement in volume results in a 20% improvement in operating income
- 5% improvement in price results in a 33% improvement in operating income
The problem, Dr Colman noted, was that pricing is unlike any other process. Achieving accurate pricing is also complex because it typically involved too many people, too many options, too many interactions and too little time.
Adding a further layer of difficulty is the fact that three-quarters (75%) of businesses have experienced higher price pressure in the past two years, according to Simon-Kucher & Partners data.
The top five reasons for this are low-price competition (47%), increased customer negotiation power (33%), increased price transparency (32%), increased professional procurement processes (23%), and a need to meet targets (16%).
It’s worth noting that apart from the final reason (need to meet targets), each of the other reasons were external, rather than internal pressures.
Dr Colman added: “Another reason cited was ‘Our customers tell us we are too expensive’. Of course they do! Internally, we place far more emphasis on this than our customers do – you need to assess the value you are bringing and the willingness of customers to pay for that value.”
His closing words were that there are three kinds of companies:
- Those who make things happen
- Those who watch things happen
- Those who wonder what happened
Which one accurately describes your business?