Turning pricing power into profit
Companies often overlook pricing as a driver of earnings growth, instead defaulting to cost cutting and other measures. Here are five steps to growth through pricing.

March 2015 | byJay Jubas, Dieter Kiewell, and Georg Winkler

http://www.mckinsey.com/insights/marketing_sales/turning_pricing_power_into_profit

Very powerful set of tools that is often overlooked

At a time when companies across all B2B sectors are finding it hard to maintain—let alone increase—profitability, the systematic improvement of pricing capabilities can have a lasting positive impact. In fact, our data, which cover more than 1,000 pricing-excellence and performance-improvement initiatives in a range of industries, clearly show that such efforts typically translate into an increase in return on sales of two to seven percentage points, depending on the sector. However, only companies that increase their level of analytical rigor and practical know-how will unlock pricing’s full potential to drive both the top and bottom lines. We believe five steps are essential for turning pricing into a profit engine. 

. Provide meaningful transparency into pricing dataPricing managers often lack a clear understanding of how profitability varies among regions and product lines, and they know even less about how it can vary among individual customers or transactions. 

 Understand what customers really valueFor all the sophistication provided by advanced analytics to master a complex array of prices, the price of a product or service ultimately depends on how much a customer thinks it’s worth—that is, “value pricing." 

Move from sales reps to ‘value negotiators’
Determining the best price means nothing if sales reps can’t convince customers to accept it. For this reason, it’s critical that sales reps have important pricing capabilities, such as sound judgment to manage time, negotiate thoughtfully, and adjust pricing guidelines in order to maximize value and minimize the risk of customers defecting 

Provide on-the-job training to build confidenceWhile most companies understand it’s important to build the pricing skills of their people, few move beyond basic training in classes or online. Successful companies, however, use adult-learning techniques, such as experiential learning, to embed the new skills in the front line. The most effective programs rely on a mixed model of education and implementation known as “field and forum.”

 

Change the cultureIn our experience, even the best pricing programs will fail in the long term without a deliberate commitment to overcome the entrenched habits and shifting priorities that doom most change programs. Ingraining pricing success over the long term requires putting in place an “influence model” that includes role modeling, fostering understanding and conviction, developing talent and skills, and implementing reinforcement mechanisms.