The Scientific Art of Pricing

There is a curve ahead for industrial companies. Indeed, our central macro scenario requires that a change of direction be negotiated, from years of downsizing to getting ready to seize cyclical growth opportunities. The transition to a reflationary environment, should it materialize, will have many micro-economic consequences. One of which relates to pricing.

Companies with ‘perishable’ goods, including hotels, utilities and airline companies have long pioneered strategies to extract the most from their customers through extreme market segmentation. On-line retail companies such as Amazon are now implementing aggressive real-time pricing strategies whereby prices are continuously adjusted. Gone are salespeople’s instincts. Artificial intelligence is taking over.


Our sector is in many ways fundamentally different from the retail sector. Yet, is it as advanced as it could be when it comes to pricing? No, but it is not alone: fewer than 5% of Fortune 500 companies have a full time function dedicated to pricing.(2) A Gardner survey suggests that the relatively limited attention to pricing analytics is explained by a lack of management bandwidth, daunting complexity in terms of data collection and management, or simply a lack of expertise in this field.


Admittedly, an advanced, value-based pricing strategy is a sophisticated tool.(3) It requires significant investments in scientific pricing technologies (such as conjoint analysis, KANO, demand elasticity analysis), dedicated officers, as well as a deep rethink of a firm’s organization, possibly under a Chief Pricing Officer (‘CPrO’). And some patience, since most pricing strategy projects tend to be implemented over a couple of years (talking about immediacy…).


It may be worth the effort, though. Pricing consultants are naturally quick to argue that ‘seeing a product as a commodity tends to be a self-fulfilling prophecy’ or that ‘pricing power is not a destiny, but a learned behavior.’ The Boston Consulting Group argues that the right pricing strategies could boost revenues by 2-8%, most of which flows to the bottom line. Furthermore, a focus on the value to clients may help develop higher quality products, solutions and services, thereby creating a positive feedback look between price and value.

As industrial companies seek to sell new, data analytics-based solutions to their customers around asset and process optimization, the ability to expertly scope and price such innovative services represents a source of competitive advantages. Gardner identifies a number of fast-growing companies operating in the price optimization software space, including Pros Holding (investor day materials here), Vendavo, Vistaar and Zilliant. They offer at a minimum pricing analytics, optimization and execution solutions. They too are benefiting from advanced, real-time data analytical capabilities to provide their clients with dynamic pricing recommendations.


There are, however, limits to the pricing optimization game. A Harvard Business Review article suggests a focus on ‘shared-value pricing’ whereby any value generated by a product or service ought to be fairly split between a firm and its customer. They provide many examples of smart, albeit extreme pricing strategies designed to extract the most out of clients which backfired.


An economic rebound, new types of services for industrial customers and increasingly sophisticated pricing optimization software offerings – these variables could represent an interesting cocktail which may bring pricing analytics to a new level in our Diversified Industrials world.


Sources

  1. Wall Street Journal, “Toilet Paper Priced Liked Airline Tickets” & Inflation on the Rise, September 2012

  2. MIT Sloan Management Review, “Is It Time to Rethink Your Pricing Strategy?”, June 2012

  3. Harvard Business Review ”A Quick Guide to Value-Based Pricing”, August 2016

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