Category: 3 – SHELF it (All Categories are 1 – Read ASAP!, 2 – BUY it!, 3 – SHELF it, 4 – SOMEDAY it)
Comments: I read this book thanks to preparation for a project at work. Really good book on pricing written by pricing experts from McKinsey & Co. and makes for a good read.
Pricing moonlights as a seemingly boring topic but is at the heart of understanding profit levers in a business.
Top 3 learnings:
1. Pricing is the single most powerful pricing lever in business. A 1% increase in price for an average fortune 500 company results in an 8.4% increase in profit (!) versus a 1% increase in volume (around 3%). If you care about being profitable, you need to care about pricing..
2. There are 4 components to understanding pricing and I’ve tried to describe these in terms of questions you need to ask yourself-
- Market dynamics: Am I market leader? What sort of pricing conduct does our market have? How can we instituionalize good pricing conduct. (Aggressive price wars result in irreversible negative consequences)
- Company strategy: What is our pricing strategy? Do we invest in a best-in-class pricing organization and invest in having great market and industry analytics? Do we understand our position in the industry via value maps?
- Transactions: Do we monitor how pricing is carried out in practice? Are our sales people watching for profit vs revenue? How does our pocket price distribution look? (Pocket price is the eventual price for a project following all discounts, rebates, etc.)
- Pricing infrastructure: Do we have IT and enabling systems that support our pricing organization
3. There’s tremendous areas of opportunity in the organization. A few points critical to good pricing are –
- Solid market information so you understand your cost and benefit in relation to the market
- Sales data to understand “pocket price” i.e. what is the net price you receive on your products.
- Pricing infrastructure for your sales team to understand what are good practices and what aren’t