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6. The power of Pricing - TERRY ALLEN 27 The power of...

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TERRY ALLEN
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pricing The power of t few moments since the end of World War II has downward pressure on prices been so great. Some of it stems from cyclical factors—such as sluggish economic growth in the Western economies and Japan—that have reined in consumer spending. There are newer sources as well: the vastly increased purchasing power of retailers, such as Wal-Mart, which can therefore pressure suppliers; the Internet, which adds to the transparency of markets by making it easier to compare prices; and the role of China and other burgeoning industrial powers whose low labor costs have driven down prices for manufactured goods. The one-two punch of cyclical and newer factors has eroded corporate pricing power and forced frustrated managers to look in every direction for ways to hold the line. In such an environment, managers might think it mad to talk about raising prices. Yet nothing could be further from the truth. We are not talking about raising prices across the board; quite often, the most effective path is to get prices right for one customer, one transaction at a time, and to capture more of the price that you already, in theory, charge. In this sense, there is room for price increases or at least price stability even in today’s difficult markets. 27 Michael V. Marn, Eric V. Roegner, and Craig C. Zawada Transaction pricing is the key to surviving the current downturn—and to flourishing when conditions improve. A
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Such an approach to pricing—transaction pricing, one of the three levels of price management ( see sidebar “Pricing at three levels”)—was first described ten years ago. 1 The idea was to figure out the real price you charged cus- tomers after accounting for a host of discounts, allowances, rebates, and other deductions. Only then could you determine how much money, if any, you were making and whether you were charging the right price for each customer and transaction. A simple but powerful tool—the pocket price waterfall, which shows how much revenue companies really keep from each of their transactions—helps them diagnose and capture opportunities in transaction pricing. In this arti- cle, we revisit that tool to see how it has held up through dramatic changes in the way businesses work and in the broader economy. Our experience serving hundreds of companies on pricing issues shows that the pocket price waterfall still effectively helps identify transaction-pricing opportunities. 28 THE McKINSEY QUARTERLY 2003 NUMBER 1 Transaction pricing is one of three levels of price management. Although distinct, each level is related to the others, and action at any one level could easily affect the others as well. Businesses trying to obtain a price advantage— that is, to make superior pricing a source of dis- tinctive performance—must master all three of these levels.
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