Pricing ROI, Pricing Capabilities and Firm Performance | Journal of Revenue and Pricing Management
ABSTRACT
Pricing is not only an important activity but frequently also a very important expense for industrial companies. In this short article we examine whether an improvement in measuring the return from pricing (pricing return on investment (ROI)) leads to an improvement in pricing capabilities and firm profits. The answer to this question is not trivial: performance measurement is costly and could, at least in theory, reduce performance. We survey 166 marketing and pricing managers from business-to-business companies globally and find that the effectiveness of pricing ROI measurement is positively related to firm performance only if pricing capabilities are well developed. This article offers two contributions: it explores the concept of pricing ROI, and it documents a positive link between pricing ROI and firm performance. To the ongoing debate on antecedents of pricing capabilities this research thus adds a further, so-far unexplored, perspective.
INTRODUCTION
Pricing is a key element of the marketing mix: ‘Of all the tools available to marketers, none is more powerful than price’ (Han et al, 2001, p. 435). Effective pricing has benefits, but pricing is also costly. Consider the following: businessto-business (B2B) companies are increasingly establishing a dedicated pricing function, which comes at an expense (Hinterhuber and Liozu, 2012). In many B2B companies, chief executive officers are personally championing the pricing function, dedicating substantial managerial attention, resources and time on the corporate agenda to pricing, which again has non-trivial costs (Liozu and Hinterhuber, 2013). Finally, price promotions are a very substantial expense and a key concern for manufacturers and retailers alike (Hilarides, 1999).
Obviously, a number of companies measure the returns from marketing and pricing activities. Consider the following two contrasting examples. Take General Electric: a reporter asks Beth Comstock, Chief Marketing Officer, about the speci fic approach the company uses to relate multibillion marketing investments to financial outcomes. She answers flatly: ‘I would say that we haven ’ t figured it out yet ’ (Comstock, 2008, p. 1). Contrast this with Coca Cola: in a presentation at the Marketing Science Institute, Ram Krishnamurthy, Group Marketing Director, illustrates the company’s approach to optimizing the return on investment (ROI) from pricing and marketing activities. The company uses marketing variance analysis and a hierarchical Bayesian approach to determine how many dollars to allocate to which brand in which territory at any given moment in time so as to generate a pre-de fined level of incremental pro fits (Krishnamurthy, 2010). Model parameters adjust in real time, and marketing executives activate only those speci fic levers (for example, a price increase; a cut in media spend) that maximize the expected incremental contribution margin.
These two companies, both highly admired and highly pro fitable, represent the two extreme points on a spectrum of effective marketing ROI measurements. Our key research question is: Does this difference make a difference? More formally: Does the difference in effectiveness of measuring the return from pricing lead to performance differences?
The answer to this question is not trivial. Measurement effectiveness could be associated with firm performance. Measurement itself, however, is costly; furthermore, intuition, which is quick, could, at least in principle, lead to better performance than analytical performance measurements.
We survey 166 marketing and pricing managers from B2B companies globally and find that the effectiveness of pricing ROI measurement is positively related to firm performance only when pricing capabilities are well developed. If pricing capabilities are weak, improvements in measurement effectiveness do not lead to superior performance. Our data thus suggest that firms need to develop their pricing capabilities first in order to improve firm performance via measurement systems that analyze the effectiveness of investments in pricing. Our data suggest that investments aimed at improving measurement effectiveness – investments in software, for example – are misguided and will not increase firm performance unless pricing capabilities are well developed in the first place.
The results of this study therefore seem to indicate that, for a quantitative discipline such as pricing, formal analysis leads to high performance under conditions of high pricing capabilities. Whether this is true also for other marketing disciplines – say, branding or product development – would make a fascinating study for future research.
This short article is organized as follows. We first summarize the relevant literature and then present our key hypotheses. Following that, we describe our survey instrument and the sample and subsequently discuss key findings and implications for industrial marketing theory and practice.
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