PhD. Manu Xavier Carricano
In 2012, the top performing Spanish companies that compute IBEX35 communicated their worst results in the last 10 years. Even if revenues increased, operating results dropped dramatically. What could appear in some departments as good news –volume erosion stopped- reflects one the critical issues for Spanish companies: a poor pricing that affects short term performance, and endangers future profitability.
One of the key issues observed in Spain is that after years of volume decrease, many companies have entered into price wars dynamics. One example: a premium Japanese brand in the food industry that struggled during the last ten years to enter the Spanish market, after having explained and defended its premium positioning, quite disruptive with the local habits. The brand recently decided to cut its premium, from a 40% against its first competitor, to less than 10% today. Consequence? Very reduced on volume… very strong on current and future profits.
How many companies in Spain (and other European countries) are currently obsessed by volume and underestimate current and future impacts on profitability? If you recognize this symptom, that is maybe because your company is also sick of poor pricing.
When implemented adequately, pricing solves several issues and delivers a positive impact in a challenging economy.
First, pricing provides visibility on business operations. One of the first actions to be taken when creating a pricing department, is to create a pricing database in order to triangulate data usually fragmented into functional silos (Transactions / ERP, Market / CRM, Control, etc.). This step is a huge progress, as the many factors that influence firms performance and their interaction are made visible for all the stakeholders involved.
The second contribution is reflected in this famous quote: “You can’t manage what you don’t measure” (E. Deming). Data comes first, but the value added lies in measure and analytics. Pricing provides insights that shape firms capabilities to efficiently execute strategies: where to we get our margin from? What would be the impact of a price modification on my products? How can I increase volume while maintaining average contribution? What should be my premium level compared to competition? What is the optimal sequence of price increases? Is my sales policy efficient? Etc. All these critical business decisions find their answer with pricing analytics & insights.
But analytics do not ensure execution if not sustained by robust governance: people, skills, culture for change, reporting lines, budget, among other play a critical role in making it happen.
So, what would be the treatment? To recover from poor pricing, companies need vision & preparation: vision to establish a clear roadmap of actions to be taken, of responsibilities, and expect results. Preparation of the key people to be involved, time and resources needed, in order to prepare the organization for change and speed-up the achievement of the first positive results, first sign and most important step towards recovery.