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Is it time to re-think pricing?

Feb 12, 2014
Following a recent UK pricing survey conducted by KPMG, the consulting company is advising businesses that they need to move on from recession-driven, volume-at-all-costs pricing or risk long-term damage to their company’s revenues and profits.

According to Robert Browne, partner in KPMG’s Strategy Group, the recession has forced many companies to focus squarely on volume and fight for every point of market share against a backdrop of shrinking demand and a buyer’s market.  “After several years of this, companies have been conditioned to think of pricing simply as a lever to drive volume – that by lowering prices, volumes will increase or at the very least, be maintained,” he said. “Whilst this strategy may have helped businesses survive the recession, it isn’t sustainable for the long term.”

Mr Browne continued by saying that pricing is still overlooked and underdeveloped by most companies. “In our research this year, over 70 percent of companies said they could increase profits by at least five percent through more effective pricing and 40 per cent believe they can generate at least a 10 per cent profit improvement.”

KPMG says that the impact of under-developed pricing strategies is best illustrated by the responses amongst companies within the food and beverage sector, where prices in some product categories have been reset permanently lower by relentless discounting and promoting. Before the recession, discounts of 10 and 20 per cent were commonplace and typically had a clear objective - for example to move older stock. However, now ‘3-for-2’ and ‘2-for-1’ offers have become so prevalent that shoppers will only buy on these terms.  “The harsh reality is that lower prices do not drive enough volume if everyone lowers their prices, or increase promotional discounts, at the same time,” said Mr. Browne.   

KPMG’s research found UK companies fall into two distinct pricing camps. Half of companies surveyed are investing in profit-driven, proactive, and value-based pricing. Yet the other half has not moved on from the more traditional share-driven, reactive and cost-based pricing. KPMG predicts that within the next five years, or even sooner, sophisticated pricing analytics will transform pricing in the UK and other developed markets. “In the future, prices for some products may change based on the time of day, month or year, or even the weather,” said Mr. Browne. “Consumers have already demonstrated they can accept these pricing strategies for travel and seasonal pricing strategies, particularly around Christmas, have been around for decades.”

The moving industry worldwide has suffered from a lack of ingenuity in pricing for years. In many cases the price of moves is dictated by the lowest price available with little, if any demand-related variation, and an acceptance that the customer won’t pay for quality.  The concept of variable rates is not new.  Nor is the principle of selling quality.  The problem is that when the chips are down all the theory goes out of the window as companies fight to survive.  Perhaps now, as the market recovers, is the time for a re-think with companies developing more innovative pricing structures and focussing more on selling quality than competing on price at all costs.

Photo:  Robert Browne

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