Pricing in the 'new normal' - PwC

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Pricing in the
‘new normal’
Driving growth in a
stagnant economy

In summary
• Pricing is a key growth and profit
lever in the current economic
environment
• Most businesses are yet to achieve
pricing excellence
• Taking different perspectives on
pricing highlights significant
opportunities
• Pricing excellence requires senior
management commitment

Pricing is a key growth and
profit lever in the ‘new normal’
The ‘new normal’ is
characterised by low growth,
high inflation and volatility
The ‘new normal’ is forecast as a
prolonged period of disappointing GDP
and consumer spending growth in
western economies, lasting into
mid-2010s. There will be periodic
bursts of inflation, driven by energy
and commodity price movements,
adding to growth volatility. Prices for
energy and other natural resources are
expected to be high, and financial
market volatility is forecast to
continue.
Figure 1
The power of pricing
Volume growth is hard to
achieve and cost reduction
opportunities have been largely
exhausted
Before the financial crisis, helpful
tailwinds meant economic growth
could be taken for granted which is no
longer the case. Driving growth
through M&A is an option, but getting
deals done is not straightforward given
economic uncertainties.
In developed economies, most
companies have largely exhausted cost
reduction opportunities.
Price pressure and volatility
are increasing
Price pressure is increasing; consumer
confidence and spending continues to
be depressed and price transparency is
increasing, whilst companies are
focussing more on optimising
procurement.
Increased volatility of both demand
and costs is making pricing, and
forecasting and managing profit,
increasingly challenging.
Pricing is a key profit lever
In this ‘new normal’ economic
environment of low volume growth,
rising price pressure and greater
volatility, achieving pricing excellence
is a key source of competitive
advantage.
Unlike other levers, such as growing
volume or reducing operating costs,
pricing changes fall directly to the
bottom line, with a 1% price increase
on average delivering an 8% impact on
profit. Even small improvements can
have a material financial impact and
are worth pursuing.
Source: PwC analysis
Pricing in the ‘new normal’
1

Most business have not
fully tapped their pricing potential
Most
businesses
fail to
optimise
pricing
Whilst pricing is a key profit lever, most businesses fail to fully realise their pricing potential.
In our experience, this is due to a multitude of factors:
• Quantifying the benefits from pricing changes is harder than for operational changes and requires
considerable judgement
• Identifying pricing opportunities is an analytical task and often requires external market/customer
information which can be overwhelming for many business to collect and then analyse
• Pricing has a market impact and can change customer and competitor behaviour and is therefore
seen as high risk
• Realising benefits from pricing insights can be multi-disciplinary involving changes in sales and
marketing, product development and even strategy
• Companies see their markets as competitive with little or no room to increase prices
• Pricing is considered to be tactical and not strategic and receives little focus
• Often there is no clear accountability for pricing and it therefore does not receive the same focus as
say operations, finance or IT which are competency areas or cost centres in most organisations
Sub-optimal
pricing has
a negative
impact on
performance
Due to sub-optimal pricing, many companies inadvertently:
• Set prices based on cost plus or competitor prices rather than the value customers perceive
• Price to maximise sales and/or volume rather than profit
• Provide rebates or marketing incentives that are not commensurate with the volume of business
received
• Do not capture opportunities to increase prices due to market changes
• Over discount or discount at the wrong time
• Undercharge given the benefits customers’ receive relative to alternatives
• Invest in products/services that are thought to be margin additive but which are margin dilutive
Pricing excellence requires
making a trade-off between
price, volume and profit. It is
achieved by having a deep
understanding of customer
value drivers, and
facilitating the organisation
to deliver what customers
want, at a price that they are
willingly pay.
2 Pricing in the ‘new normal’

Pricing excellence requires
taking different perspectives and
senior management commitment
Considering pricing from
different perspectives
highlights significant
opportunities
Considering pricing from different
perspectives simplifies a complex
subject and unearths opportunities.
In our experience working with
companies across a range of industries,
there are four perspectives that are
particularly useful to consider:
Industry
lens
Industry level trends such as changes in
the supply and demand balance in a
market or cost changes, impact different
industries to different degrees. However
in all cases, a forward looking
understanding of how an industry is
changing is an important consideration
in pricing, particularly in the current
volatile markets.
Customer
lens
Individual customers attach differing
levels of value to different product/
service benefits. Deeply understanding
these value associations, how demand
changes with price changes, and how to
position offerings versus competitors, is
a core competency in achieving pricing
excellence.
Realising the benefits from changes in
pricing requires alignment across
functions, with clear responsibilities for
price setting, the right organisational
structure and incentives, as well as the
tools, technology and processes to
support pricing objectives and monitor
performance.
Understanding prices achieved on a
transaction by transaction basis, across
customers, products and channels is
critical. Knowing the true cost to serve,
whether discounts are commensurate
with purchase volumes and if rebates are
justified, requires granular analytical
insight and financial rigour.
Operations
lens
Transaction
lens
Sustainable pricing excellence
requires senior management
commitment
Using pricing to improve profitability
does not always come down to simply
increasing prices. Often changes in
product/service features, marketing
strategy, channel focus or the pricing
basis, for example airlines deciding to
price for luggage separately, are the
key levers to improving performance.
Consequently, effecting the required
changes and achieving sustainable
pricing excellence requires senior
management attention and
commitment.
Has your business fully tapped its
pricing potential? Can you answer ‘yes’
to the questions overleaf?
Pricing in the ‘new normal’
3

Have you fully tapped
your pricing potential?
Pricing checklist
Yes Somewhat No
Customer
1. We have a clear approach to segmenting our customers based on a deep
understanding of their needs, and frequently update the segmentation
2. We really understand what product/service benefits each customer segment is
prepared to pay for, and how much they are willing to pay
3. We frequently use insights from customer segmentation analysis to review our
pricing decisions
4. We set prices based on the value our products/services provide to customers and
not on a cost-plus or competitor benchmarking basis
Industry
5. We track key industry factors influencing our pricing decisions (e.g. supply/demand
trends, cost trends, regulatory changes, etc.)
6. We track competitor prices and have a fact-based approach to understand pricing
trends in the near, medium and long term
7. We always consider pricing implications of our key business decisions (e.g.
investment in new capacity, M&A)
Transactions
8. We monitor prices we charge at a transaction by transaction/order by order level,
on a weekly/monthly basis
9. We are confident that we achieve the maximum possible price on every transaction
10. We have a clear understanding of the true cost to serve for each transaction
Operations
11. Senior management has accountability for and is involved in pricing decisions
12. Our sales & marketing team’s incentives are aligned to our pricing objectives
13. We have a clearly defined and limited discounting authority, and the rules are
rigorously enforced
14. We track the appropriate key performance indicators on a timely basis to inform
pricing decisions at different levels of our organisation
4
Pricing in the ‘new normal’

Case study
Higher profits and high-quality service
The context
Our client faced a slowdown in sales
volume growth, due to increased
competition and the economic
downturn. During the last years their
internal complexity increased and
prices of raw materials rose. On top of
that, the organisation found it had no
longer sufficient insight into what their
customers were really looking for...
and willing to pay, this all leading to
lower profits. To cope with those
challenges, the client started a
programme to enhance profit while
achieving higher service levels.
PwC approach
Together we defined a strategic
framework for future pricing direction,
containing 8 building blocks to bring
their pricing organisation to the next
level. Differentiated pricing segments,
a cross-functional pricing board,
fact-based price benchmarks and an
execution tool for sales are only 4 of
them. With the client, we defined an
action plan to do the detailed design
and actual implementation of each of
those 8 building blocks. This involved
price analytics to deduct the right
pricing rules, designing the new
price-setting mechanics and the right
organisational structure, incentives,
processes and tools to support the
pricing objectives and monitor
performance.
We assisted the client as from the
definition of the pricing strategy till
the full implementation of the new
processes, organisation and systems.
Outcome
A complete new pricing organisation
allowing sales to quote faster and with
more confidence. The new pricesetting
mechanics are embedded into
the systems, accompanied with clear
price benchmarks and escalation rules.
A higher focus on value, differentiated
per customer segment, while covering
the volatility in their raw materials.
Pricing in the ‘new normal’
5

Contacts
Pieter Bauwens
Director, Belgium
Tel: +32 (0) 9 268 8057
pieter.bauwens@pwc.be
Mark Haller
Partner, US
Tel: +1 312 298 2550
mark.haller@us.pwc.com
David Lancefield
Partner, UK
Tel: +44 (0) 20 721 32263
david.lancefield@uk.pwc.com
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