Renowned investor Warren Buffett has said, “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10%, then you’ve got a terrible business.”
Yet pricing receives scant attention in most companies. Fewer than 5% of large retail companies have a full-time function dedicated to pricing, according to data from the Professional Pricing Society, the world’s largest organization dedicated to pricing. McKinsey & Company has also estimated that fewer than 15% of companies do systematic research on this subject.
This neglect is puzzling, as numerous studies have confirmed that pricing has a substantial and immediate effect on company profitability. Studies have shown that small variations in price can raise or lower profitability by as much as 20% or 50%.
If pricing power is so important, who owns it within your organisation?
In recent research companies that achieved better pricing all had top managers who championed the development of skills in price setting (price orientation) and price getting (price realization), as well as the introduction of pricing tools.
Regardless of their industry, the degree to which managers focused on developing these two capabilities correlated to their companies’ success in achieving a better price for their product than their competitors.
Without managerial engagement, companies typically use historical heuristics, such as cost information, to set prices and yield too much pricing authority to the sales force.