Raise Your Pricing IQ
Short Takes...on Analytics
|Posted by Ranjit Singh, Principal, Deloitte Consulting LLP|
Many businesses have trouble measuring their pricing IQ. They can't identify which products are performing well and which aren't. While a high pricing IQ lets businesses take the next step toward wealth creation, low economic intelligence leaves them hard pressed to make choices, design plans, or make strategic decisions.
Some executives see earnings per share (EPS) as the leading indicator of return on capital, but this can be misleading. Although EPS is important, it is not the primary contributor to shareholder value. You see, analyzing earnings alone can leave out an understanding of the capital required to generate those earnings. Additional value can't be generated if you increase the amount of capital consumed by the development of your products. While products with high net margins can appear attractive, they are a negative contributor if a disproportionate amount of working capital and fixed assets are required to manufacture and provide them. This can have a cascading effect of negative value as companies launch new product after new product only to realize diminishing returns.
On the other hand, companies with a good understanding of how pricing and profit relate to capital consumption can create targeted pricing actions more easily, potentially boosting sales through improved product mix. A big challenge for companies with a high Pricing IQ is to avoid the spiral of negative return. This can be done by taking steps to confirm products produce returns equal to or greater than the company average. Target pricing, pricing strategies, transactional policies, and business model choices can have a significant impact on the outcome of these decisions.
Executives can use pricing analytics to sort through the many variables to determine if pricing strategies are designed to provide value. How can you tell whether to lower or raise a price on a product without analyzing these variables? If a customer wants a made-to-order product fast, then the plant may have to alter its production processes, which means price should increase. But if the made-to-order products are sold only at certain times of the year and with a long enough lead time, then the products can create value at a lower price point.
How does your business's pricing measure up? Are you serving profitable markets? Is your business producing the results you want? Is your capital invested producing the value you need?
A strong pricing IQ may be the answer.
As used in this document, "Deloitte" means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.
Copyright © 2012 Deloitte Development LLC. All rights reserved.
Member of Deloitte Touche Tohmatsu Limited
This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.