Selling their products at the right price is often put forward as something that is extremely important for maximizing the long-term profits of companies. At the same time, pricing capability is regarded as a light-weight component of the company’s overall strategy.
The researcher Niklas Hallberg, School of Economics and Management, Lund University, finds in his study of strategy and pricing in five packaging companies in the Nordic countries, Central Europe, and the U.K. that pricing is an incredibly complex story. Price is a major strategic consideration and a matter for top management.
“This is about a long-term strategy for the company that is difficult to purchase. If you are successful in your pricing, you gain an advantage over your competitors that they can’t make up for even if they try. The right experience, a well-established IT system, and the proper overall organizational structure all take time to create, and there’s no quick fix,” he says.
To find the right price, companies need to invest in three overarching areas involving, people, systems, and organization.
“It is clearly a factor of success to have people in key positions who have the communicative or business sense required to gather the right information in customer-specific pricing situations. This is silent knowledge that companies can’t acquire quickly. It’s a matter of having individuals with the right experience. All the companies I studied have a ‘price guru’ like this.”
Functioning technical systems are a neglected area:
“I was surprised how little investment the companies put into IT systems and strategic control systems for market information. This is because these decisions are largely based on perceptions and experience. Owing to the complexity of the decisions, with perhaps some thousand products and hundreds of different customers every year, system capital is replaced with human capital.”
Companies find it difficult to make rational calculations:
“A good calculation requires correct information about what it costs to produce a product. This sounds trivial, but I’m seeing that companies have rather poor control over what it costs to develop a product, to produce and transport a product, and then place that cost in relation to what the competition is offering.”
Control over organization plays a role in coordinating pricing decisions:
“Different decision-makers in the organization are driven by different interests. For instance, salespeople have a natural tendency to want to sell, and they often have a close and personal relationship with their customers. Salespeople want as little hassle as possible, and the customers press the price downward. In other words, it’s convenient for the sales staff to sell at a price that is lower than optimal for the company’s profitability.”
Niklas Hallberg relates that it is relatively common for pricing decisions to be controlled by making sure that the information the salespeople receive shows that the cost of a product is higher than it really is. This prevents the sales staff from lowering the price too much.
“Generally speaking, I would say that pricing decisions need to be made high up in the organization. The advantage of having salespeople set the price is that the company can avoid losing an order, even though the average price is lower. But many companies want to sell based on customer value, that is, the value the buyer feels a product has, rather than simply being the cheapest product.”