Price setting and price getting require discipline — not luck. Almost any business can improve its pricing performance, provided it approaches pricing in a structured way.
Renowned investor Warren Buffett has said, “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10%, then you’ve got a terrible business.”1 Yet pricing receives scant attention in most companies. Fewer than 5% of Fortune 500 companies have a full-time function dedicated to pricing, according to data from the Professional Pricing Society, the world’s largest organization dedicated to pricing.2 McKinsey & Company has estimated that fewer than 15% of companies do systematic research on this subject.3 And only about 9% of business schools teach pricing, according to the Association to Advance Collegiate Schools of Business.4 This neglect is puzzling, as numerous studies have confirmed that pricing has a substantial and immediate effect on company profitability. Studies have shown that small variations in price can raise or lower profitability by as much as 20% or 50%.5
Pricing Is a Skill
Over the past 18 months, we interviewed 44 managers — from CEOs and CFOs to heads of business units and professionals in marketing, pricing and finance functions — in 15 U.S.-based industrial companies. (See “About the Research.”) These companies varied in size from about 50 to more than 2000 employees and had dramatically different pricing capabilities.6 In the course of this research, we found that pricing power is not destiny, but a learned behavior. While competition, costs and price sensitivity within a market affect the parameters within which companies set prices, superior pricing is almost always based on skill. The companies we found that had achieved better pricing all had top managers who championed the development of skills in price setting (price orientation) and price getting (price realization). Regardless of their industry, the degree to which managers focused on developing these two capabilities correlated to their companies’ success in achieving a better price for their product than their competitors.