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PAPER: Building a Better Pricing Infrastructure | McKinsey&Company

Well-managed companies already recognize the critical role pricing plays in driving performance. A foundation that underpins excellence in pricing is the key to realizing its potential.

Over the past two decades, most companies have recognized the bottom-line impact to be gained through effective pricing. Yet awareness by itself is not enough. Tapping the full promise of pricing requires an infrastructure to drive real and sustained pricing performance. With such a foundation, a company can establish and strengthen pricing activities by creating deliberate decision processes, a specialized pricing organization, mechanisms that appropriately measure and reward pricing excellence, and robust support tools and systems.

A pricing infrastructure can be difficult and costly to create. It requires investing appropriately, empowering the right people, articulating clear targets and goals, and managing risk. Yet the benefits of realizing true pricing excellence are worthwhile: a one-percentage-point improvement in average price of goods and services leads to an 8.7 percent increase in operating profits for the typical Global 1200 company.1 Since a well-executed pricing-improvement program often yields price increases of two to four percentage points or more, sustaining a long-term price advantage may represent roughly 15 to 25 percent of a typical company’s total profits.

CEOs have certainly become aware during the past two decades of the way pricing improvements can drive profit gains. Frameworks to identify pricing opportunities—from pocket-price waterfalls to price bands to value maps—are now widely accepted. Wall Street has begun rewarding businesses that improve pricing and punishing those that fall into price wars. Yet too many companies try to get by with minimal investments in their pricing infrastructure, grabbing quick hits that generate fast and easy bottom-line improvements, then declaring victory and focusing time, energy, and talent elsewhere. The result is that the actual impact of pricing-infrastructure investments diminishes over time, with such efforts falling far short of their full potential.

Successful companies deliberately build a strong pricing infrastructure that underpins and sustains pricing excellence. They start by focusing on the most critical pricing processes, then consider who “owns” and drives the organization’s pricing profit center. A constant focus on performance management inspires managers to improve their pricing performance in the context of the overall business strategy, while holding them accountable to meet or exceed expectations. Finally, systems and tools facilitate pricing processes, help people in the pricing organization raise their game, and support performance management. Implementing these elements in this order—processes, organization, performance management, and systems and tools—increases the likelihood that pricing-infrastructure investments will have an enduring impact.

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High-caliber organizational elements

Processes to address vital pricing decisions add value only if these processes function smoothly by conferring clear ownership and accountability. Too many companies try to get by with an ad hoc or management-by-committee approach, with no clear owner; a process emerges only when absolutely necessary. Others believe that full-time pricing personnel are not required and that responsibilities can be spread across staff in areas such as sales, marketing, and product management. But these approaches usually engender an insufficient and inconsistent focus that leaves too many significant pricing opportunities unrealized.

Staffing an organization responsible for a significant portion of a company’s earnings requires a deliberate recruiting strategy, compensation commensurate with the importance of this unit, and clarity about the types of skills and attitudes required for each of its roles. The executive in charge should be responsible for coordinating the rollout of pricing methods, counseling sales managers and sales reps on the use of formal pricing methods, controlling the impact of pricing metrics and strategies, and embedding pricing methods and tools in the company’s culture. Fundamentally, this executive should be responsible not only for managing day-to-day pricing activities but also for fostering the proactive, continuous-improvement mind-set that separates high-performing pricing organizations from merely good ones.

We also recommend separating the pricing group from any unit responsible for negotiating prices with customers. This division creates a healthy tension between price negotiators and price managers that is difficult to maintain when price management resides within sales groups.

Finally, high-performing organizations regularly evaluate their overall health and vitality—and pricing shouldn’t be different. Three practices are recommended. The first is a well-defined career path: employees should see the pricing organization as an excellent stepping-stone to career advancement. The second is 360-degree feedback for key roles, because members of the pricing organization must interact effectively with so many groups. The final practice is monitoring health metrics, such as the rate of employee turnover and job satisfaction, so trouble can be spotted early and addressed.

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Building a better pricing infrastructure | McKinsey & Company.