Pricing and Profitability Management: A Practical Guide for Business Leaders

Why Taking a Holistic Approach to Pricing Matters

Big Track Automotive (a fictional company, but reflecting a typical situation and solution that can apply to real companies) sells high-performance engines around the world. Boosted by a loyal customer base, some high-profile endorsements, and top ratings from leading consumer magazines, Big Track grew for 10 straight years. To improve profitability still further, the company decided to spend a significant amount of money to implement a new pricing software package. Using sophisticated mathematical models, the software identified key price points that would optimize the price–volume trade offs for each customer segment. The company projected that implementing these prices would add millions of dollars to the bottom line. Senior management signed off on the changes and looked forward to a banner year.

Twelve months later reality hit. The CEO was astounded to discover that profitability had not increased at all. An investigation revealed why: the sales force had been giving discounts on more than 30 percent of the company's best-selling products, canceling out the projected revenue increases. When asked why they offered so many discounts, the salespeople claimed that customers wouldn't buy at the company's targeted price. Unfortunately, the team responsible for implementing the software didn't have the budget to train the sales representatives to sell at the higher prices, nor did it have the authority to change their incentives. ...