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Why the Message of Pricing Hasn't Spread Wider

By David Mok, Director of Pricing at DePuy Spine (a Johnson & Johnson company)

Pricing as a profession has come a long way - from a role that has evolved out of someone's part-time job (marketing, finance, contracting, etc.), and that wasn't long ago, to a full-time profession accompanied by a title having the word PRICING in it. I happen to be one of those fellows who has been a part of the pricing revolution. However, it seems that the overall message of pricing hasn't spread as quickly as, say, the Internet, social networking, cell phones or iPads. To be quite frank, the message that I am about to share is simply based on my own personal observations made over 10 years in the profession, as opposed to some scientific study. Nevertheless, it is based on my experience spanning four different industries - services, semiconductors, hard drives, and recently medical devices - in both B2B and B2B2C environments, ranging from a small S-Corp business to a Fortune Top 50.

My view on why the message of pricing hasn't spread wider is that companies neither have embraced nor fully understand the role and power of pricing. There are good reasons why this is occurring, and I would characterize them in three categories. First, pricing is a victim of successful business models in favorable market conditions. Second, pricing can be under-represented in role and priority within an organization, and often is. Finally, solid pricing efforts that actually deliver strong financial results can go largely unnoticed. I believe these are the internal and external forces constraining pricing from becoming a rapidly growing focal function within corporations.

First, pricing is a victim of successful business models in favorable market conditions. Imagine you are leading a company that is rapidly growing with innovative products. Financially, you are highly profitable. In two of the companies I've been with, this was exactly the situation. While the pricing function was a necessity, it simply wasn't the focal point. In fact, I would argue bad pricing practices and processes went largely unnoticed until the business climate changed. An economic slowdown, the entry of more competition or industry transformation leads customers to more options. Couple any or all of these with the customer becoming savvier in price negotiations, and bad pricing will stick out like a sore thumb. Some companies will learn to embrace pricing, but many will fall back and lean on what made them successful in the past. Those that don't embrace the pricing function quickly enough will face more difficult business conditions than they would have otherwise. For these companies, the old cliche of "you don't know what you don't know" applies. They are simply "stuck in the mud" during both good and bad times where in such environments the message of pricing doesn't get the traction it needs.

Second, pricing is under-represented in role and priority within an organization. Put another way, where does pricing reside in an organization? In my experience, more than half the time it sits with groups like product marketing, as opposed to a central pricing organization. There are good reasons for either approach, or even a hybrid, which I won't get into here. The point is this: When pricing entirely resides in a role like product marketing, it gets lost when competing for attention among the other 4Ps of marketing. Put yourself here for a moment. When you are balancing your workload to define the product, putting together the value messages and positioning, along with everything else, honestly, best-practice price setting and management take a back seat. Further, more often than not, the priority of pricing relating to attainment of revenue, profit, and share hasn't even been defined. This inevitably leads to conflicting objectives among different groups. In this environment, trying to spread the pricing message gets quickly muted because of competing organization interests.

Third and finally, efforts to deliver strong pricing results can go largely unnoticed. Even when things go favorably for pricing, the reason behind attaining the strong financial results can get murky. I recall entering a situation where the business was actually losing money, and through lots of hard work on the price management side - and other efforts as well, to be fair - we turned the business around in a year by posting the best financial performance in the history of the business. However, here is where the fun begins. Finance tries to rationalize the high performance as product mix, constrained environment, costs and so forth. Sales take credit for managing prices high - if you can imagine that, especially after countless hours of re-adjusting their low price requests. Product marketing takes credit about placement strategy, revenue planning and so forth. However, anyone who understands McKinsey's "Power of One" framework can tell you that the most profitable lever to pull is price. It's actually all in the math, yet organizations and leaders rationalize away that it's everything else. The take-away for those fortunate companies that have strong price performance is this: Don't take pricing for granted. Organizations may not fully understand what's actually under the "pricing hood" making the wheel turn to attain these high-performing financial results. In this environment, the pricing message can get lost because it gets rationalized away.

In the end, there is an uplifting message to be had. Overcoming all of these "pricing hurdles" is possible. It is not easy, but the journey is quite rewarding. I don't have any transformational magic bullets for you, but I can say this: If you're passionate about the pricing function and willing to be a champion for it inside your company, you can spread the word successfully.