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1. Bringing Decipline to Pricing

1. Bringing Decipline to Pricing - (132-139 Local pricing...

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GORDON STUDER
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M A R K E T I N G 133 any otherwise rigorously run companies are disconcertingly lax about pricing. Although a 1 percent improvement in price yields bigger gains in operating profit than a similar improvement in variable costs, fixed costs, or volumes—almost 8 percent on average across the S&P 1000— companies often base prices on the anecdotal observations of a few vocal sales- people or product managers. A lot of companies therefore end up with pricing policies that leave money on the table by failing to differentiate markets on the basis of their competitive dynamics and supply-and-demand economics. But there is a straightforward way to gauge supply and demand in individual markets. Companies can use it to decide whether their prices are too low or too high and, if so, by how much. ( See sidebar, “Pricing in the e-channel,” on the next page.) Compare apples with apples Consider a hypothetical company competing in many locations and market seg- ments. Sales branches forced to discount heavily are making little or no profit, but those that can sell near or above list price are doing quite well. Perplexingly, the high and low performers are not concentrated in particular geographic areas and don’t focus on particular product lines. The efforts of sales managers to explain the performance of their branches are as diverse as their results. But if the company sorted sales branches by locations and product lines, it may not have grouped like with like. These time-honored classifications, along with others such as size or type of average customer, often fail to account for the market environments of individual branches. And it is the market environ- ment—the level of competitiveness (a key driver of supply) and the scope of the opportunity (a key driver of demand)—that expands or limits a company’s M Cristopher C. Eugster, Jatin N. Kakkar, and Eric V. Roegner Different local market environments create quite different opportunities for pricing. You must understand these environments to set prices optimally. Bringing Cris Eugster is a principal and Jatin Kakkar is a consultant in McKinsey’s Houston office; Eric Roegner is a principal in the Cleveland office. Copyright © 2000 McKinsey & Company. All rights reserved. discipline to pricing This article, and many others , can be found on the McKinsey Quarterly website: www.mckinseyquarterly.com
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ability to set prices. Without first sorting sales branches by their market environments, a company can’t 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.
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