Manage for profit, not for share, urges Simon-Kucher & Partners' CEO.
In a recent study, we investigated the commercial and pricing processes of international companies. Some 4000 decision makers from all major service and manufacturing industries around the world participated. Almost half of the respondents from Europe, the US and Asia were from companies with more than one billion euros in sales. C-level executives accounted for one-third of the respondents. This is the by far the biggest study on pricing.
The results are shocking, even disastrous: two-thirds of the companies are incapable of achieving the right prices and revenue for their products and services. In other words, only one-third of the companies is capable and has sufficient pricing power to achieve the price it deserves for the products/services it provides.
Such a weakness has a strong negative profit effect. The two-thirds mentioned above lost 25% of their profits from weaknesses in turning value into money.
These percentages are alarming.
No company can afford to give up 25% of its profits right now. That's why managers should systematically analyze their commercial and pricing processes. Do you belong to the two-thirds of companies that are failing to monetize products and services? If so, then it's time to do something about it.
In my experience, experience supported by our study, there are three main causes for monetization weaknesses: insufficient monitoring/management, a lack of pricing know-how and poor strategies.
Monitoring and pricing know-how are critical aspects — without them, sufficient monetization won't be feasible.
Yet two other deficits have an equally powerful influence on monetization: strategy and leadership.
A big mistake companies make is to focus only on market share and volume (instead on profit).
Case in point: in a project presentation at a world-famous global company, a board member said, "Let's be honest. We all claim to be going for profit, but heads start rolling as soon as the market share drops by one percentage point. When profit goes down by 20% nothing happens."
We got a similar response at a Japanese company in Tokyo. The analysis of our project team was crystal clear. The company undersold its products. The prices had to be increased significantly. The Chief Sales Officer then said, "But then we lose market share," thereby ending the discussion. The necessary price increase was off the agenda.
Both examples are typical for the behavior of many companies and show that profit goals are pure lip service. The truth is that these companies only care about market shares and volume; margin and profit levels are of no consequence.
Price wars are the ruinous result of such a volume strategy — a result confirmed by our study.
Almost half of the 4000 respondents currently see themselves in the midst of a price war that is destroying their profits. The sad thing about a price war is that there is very seldom a winner. After the "war", which can take years, we usually find the same players as before, with slightly changed market shares but a much lower price level than before.
Avoid these kinds of senseless wars.
Develop realistic strategies with fair share targets and find the right balance between volume and margin.
In other words: strive for profit not for market share. Concentrate your entire organization on long-term profits. That also includes KPIs, incentives, the mindset of your executives and their teams.
Another simple example to illustrate this point: most companies have rankings with top sales reps. One of our clients ranked its sales reps according to sold volume. The fact that the top two sales reps had given very high discounts and had generated hardly any profit for the company was of course not shown. We changed the ranking; now it is based on the total contribution a sales rep generates. This has affected behavior and sales performance tremendously. Profit is up significantly through such a small measure.
In times of high uncertainty monetization or pricing power is more important than ever. Each company can build up and develop the necessary pricing power. Start now and prepare your company for insecure times.