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Bringing Discipline To Pricing PDF
Bringing Discipline To Pricing PDF
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GORDON STUDER
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Bringing
discipline to pricing
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T H E M c K I N S E Y Q U A R T E R LY 2 0 0 0 N U M B E R 1
ability to set prices. Without first sorting sales branches by their market
environments, a company cant make meaningful distinctions among them.
As a rule, sales branches in similar competitive environments can command
similar pricing levels. If the prices of those branches, and thus the profits they
generate, are lower than those of their true peers, the local branches sales and
marketing skills, service or logistics practices, or other capabilities are probably
at fault.1 Of course, that may not be true; in some cases, for instance, corporate pricing policies might have been poorly communicated to the branch sales
force; in others, branches may have logistics, service delivery, or even local
product-quality problems that are not within sales managements control.
Companies must take care not to compare apples with oranges at the sales-branch level. Take, for instance,
a company that has different competitors in each region of a country yet defines itself the same way in all
regionsby customer size or type, say, or by vertical industry served. If the prices of such a companys
branches vary a good deal within similar competitive environments, the company will be hard-pressed to
understand the causes.
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EXHIBIT 1
Sort branches by
market environment
Plot the
transactions
Develop
pricing action
Target
price
Supply
Average
price
Demand
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T H E M c K I N S E Y Q U A R T E R LY 2 0 0 0 N U M B E R 1
The percentage of bids that customers reject after being quoted an initial
price
The average difference between the initial quoted price and the final
invoice price
Most companies find it fairly easy to collect accurate data for the first three
categories; for the rest, they will have to accept the best data they can get.
Supply
Low
Increase average
price 1 times
standard
deviation1
High
Prices
unchanged
Low
High
Demand
Pilots will define and multiple; the multiple in this exhibit reflects the general strategies depicted
here and should be changed according to the specific strategy a company chooses.
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EXHIBIT 3
Explanation
Skewed
Outlying
branches
Multimodal
Action
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T H E M c K I N S E Y Q U A R T E R LY 2 0 0 0 N U M B E R 1
Optimal prices
Stable market share
Lack of quick pricing or volume swings
Positive field pricing
Things to watch for
Unique, niche repricing opportunities
New entrants and offerings
Corrective mechanism
Selectively reduce prices to
align them with customer
expectations
Selectively enhance benefits and
provide additional value-added
services
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Pricing can be a key lever of profitability. The system outlined here permits
businesses to price across markets for maximum profit. But since this
approach presents a mass of data to analyze, cross-organizational issues
to tackle, and difficult metrics to track, it requires investment in systems
and resources as well as strong management backing. In the end, that kind
of commitment will be a small price to pay.
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