Results
October 2003 | Business Strategy Brief
Pricing the cookies
On our mind
Philippe Thibaut
Partner
Bain & Company
Netherlands
When Black and Scholes introduced their
Nobel–winning option pricing theory in
1973, fair pricing of complex financial
instruments became reality. Yet 30 years
later, most of us are still struggling to price
a box of cookies.
No business escapes pricing decisions.
And these matter a lot. Take consumer
electronics, just extracting two percent
higher average prices can double a
company’s value. Surprisingly, pricing
usually just happens, with more or less
rationale, and in a more or less codified
process. Little wonder that clients
increasingly seek advice on the topic.
To the best of our knowledge, the cookie
pricing formula has yet to be discovered.
Pricing remains an art and theory matters
less than the test of the market. Still, there
are some ground rules that help.
1. Know what you are selling
In this issue
On our mind
Pricing the cookies
Management feature
Fixing executive pay
Guest interview
Moving to multi–brand,
multi–channel:
The new Samsonite
Trivial question? Not necessarily. Many
companies have a hard time stating their
value proposition on even the simplest
products. And then there’s the big
disconnect: are customers buying what
you think you are selling? The private
banking industry historically offered trust
and convenience and priced this offering
accordingly—sometimes through obscure
line–item fees. But today clients are buying
performance. Companies like Merrill
Lynch or Pictet have taken the lead in
performance–based pricing systems.
2. Understand your costing but know
when to override it
Should you base your pricing on full or
marginal costing? Or should you simply
ignore costing? Pricing is obviously
different if you are selling a Chanel suit,
a fighter jet, or a bag of potatoes. Though
costing serves as a basis for pricing, try
to remain value–minded. In other words,
make sure you are in a position to actually
overrule costing. You do this by establishing
a measure of the value you deliver to
your customers—“value to the client” is
becoming increasingly prominent in the
outsourcing market—and by gathering
decent competitor pricing benchmarks.
Belgian supermarket chain Colruyt has
made benchmark–based pricing a pillar
of its strategy in capturing and retaining
customers.
3. Protect your pricing
Even after you’ve thought it all through,
your pricing work may remain at the mercy
of your salesperson—a scary prospect for
some. Clearly, Mercedes enjoys superior
pricing discipline. In many industries, a
two percent discount here, or a free product
upgrade there, can seriously damage
profitability.
At the end of the day, whatever your
industry, correct pricing does matter.
Science or art, it may not earn you a Nobel
Prize, but it does make your bottom line
look noticeably better.