Is Pricing Killing Your Profits? | Bain & Company

Poor pricing practices are insidious—they damage a company’s economics but can go unnoticed for years. For example, a major industrial goods manufacturer struggled with low profit margins, relative both to competitors and its own historical performance. It traced much of the cause to a mismatch between its sales incentives and pricing strategy. The manufacturer was compensating sales representatives based solely on how much new revenue they generated. Reps thus had little motivation to protect price levels on any given deal, and most were closing deals at the lowest permissible margin.

As with this manufacturer, many business-to-business (B2B) companies have a major opportunity to improve their standing on price. To help B2B companies understand the state of pricing capabilities and how they figure into company performance, Bain & Company conducted a global survey of sales leaders, vice presidents of pricing, CEOs, CMOs and other executives at more than 1,700 companies. We gathered their self-rating of 42 pricing capabilities and outcomes.

Roughly 85% of respondents believe their pricing decisions could improve. While most executives suggest pricing is a high priority, the survey shows that, on average, large capability gaps exist in price and discount structure, sales incentives, use of tools and tracking, and structuring cross-functional pricing teams and forums.

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Pricing to the average is always wrong

One-size-fits-all pricing actually fits no one. Yet it is not unusual for sales executives to admit that “our ability to tailor prices at the customer and transaction level is rudimentary at best” or that “we are not even aware of how much margin we make on deals.”

By contrast, more advanced companies tailor their pricing carefully for each combination of customer and product, continually working to maximize total margin. They bring data and business intelligence to bear on three variables for setting target prices:

the attributes and benefits that customers truly value, and how much value is created for them;

the alternatives and competitive intensity in the business; and

the true profitability of the transaction after netting out leakage in areas such as rebates, freight, terms and inventory holding.

One North American manufacturer with margins that were highly dependent on raw material pricing suffered from an undisciplined approach to pricing. A diagnosis allocated costs at the product and customer level to determine true profitability (see Figure 3). That diagnosis provided the support needed to raise prices where appropriate in subsequent contract negotiations, leading to an average 4% increase. The company designated an executive to own related margin opportunities and track the status and effect of each price increase. As a result, the company improved earnings before interest, taxes, depreciation and amortization by 7 percentage points.