Pricing has been a hot-button issue of late – debates have arisen from water and taxi surge pricing in Singapore, to airline overbooking and drug pricing globally. These issues will only continue to exacerbate with advances in disruptive technologies, as they constantly change the way businesses, governments and consumers interact.
Through big data analytics, artificial intelligence, automation and cloud technologies, new pricing models such as dynamic pricing have sprouted up in recent times, bringing with them a slew of benefits (e.g. better service for consumers) and controversy (e.g. transparency issues).
PORTFOLIO interviews Jan Weiser, Partner at Simon-Kucher & Partners’ Singapore office. He has over 12 of experience in consulting national and international clients, all in the areas of strategy, pricing and sales. Jan leads Simon-Kucher’s private equity, insurance and life sciences practice in Southeast Asia, China and ANZ. Simon-Kucher & Partners is the international pricing consultancy behind some of the world’s most prominent products.
Give us a general picture of pricing, and in particular, the work that you do for Simon-Kucher & Partners.
JAN WEISER: Pricing is a very broad field. We know how to manage it professionally. In the past two years alone, we completed more than 1,000 pricing projects, boosting our clients’ return on sales by 100 to 500 basis points on average. Drawing on this wealth of experience, we built our “pricing universe”, probably the largest database of its kind covering all industries and regions. It contains price models, price elasticities etc. of countless products and services and is further enriched with every project we conduct.
Simon-Kucher & Partners is a global consulting firm specializing in TopLine Power®, which encompasses strategy, marketing, pricing, and sales. Founded in 1985, the company now has 1,000 professionals in 33 offices worldwide. Simon-Kucher’s practice is built on evidence-based, practical strategies for profit improvement via the top line. The company is regarded as the world's leading pricing advisor and thought leader.
Our worldwide projects have given us deep experience in every industry, product, service and aspect of pricing. From headache medications to sports cars, from mobile phone tariffs to banking fees, from new product launches to huge organizational transformation programs, we have developed price strategies, price models, price tags and everything else that the term “pricing” may cover.
How did you develop your scientific methods of optimizing product and service prices, and what are some of their salient points?
Price is the most powerful economic force in our day-to-day lives and one of the least understood. In fact, price is the most important profit driver, more powerful than fixed or variable cost, or volume. This means a price increase has the highest positive impact on profit, while a price reduction can destroy profits the fastest.
Over the years, we have developed a proven set of methodologies and tools. Most are a result of our project work, where we need to be creative and innovative. We continuously incorporate new scientific findings in the field of pricing, such as behavioral aspects, or trends such as digitalization.
How has pricing evolved in the past decades, and what were the important or disrupting factors?
The methods haven’t changed much. There are three main methods on how to price: based on cost + margin, competition and customer’s willingness-to-pay.
There are four important factors, out of which I would only call one factor ‘disruptive’:
In the 80s, businesses started becoming aware of the importance of pricing, and creating pricing functions within organizations. Companies began to realize how important pricing is as a profit driver. Until then, most improvement programs were focused on strategy development and rollout, and cost optimization. Pricing was more or less a transactional process, which was managed by Sales and Finance.
A second factor is globalization, which got a boost in the ‘90s primarily due to the rise of the Internet and cheaper shipping costs. The result was a steep increase in trade, knowledge, capital and underlying services to support this exchange. From a pricing side, this created opportunities but also significant challenges for companies to deal with higher complexity.
A third factor is that innovation and product cycles have become much shorter over the past 10 years. R&D budgets have never been higher – it’s estimated that companies spent close to US$2 trillion on R&D globally in 2016. We’re also seeing established companies easily exceed 20-30 per cent of their annual revenues on R&D, e.g. in the pharma and technology sector.
How does this relate to pricing?
From our global pricing study, we know that 82 per cent of all companies complain about increasing price pressure, which is alarmingly high; 49 per cent of companies state that they are involved in a price war. They also believe that one possible way to escape price pressure and price wars is to develop new and innovative products and/or services. We also know that 72 per cent of all products do not meet their profit targets.
One of the key factors to develop successful products is to integrate the monetization opportunity in early stages of the product development, and then design the product around the price. Porsche for instance has several pricing checkpoints along their product development process to ensure the product meets the expectations of their customers, both in terms of design/features and price.
And finally, the fourth and most significant factor is digitalization. This really disrupts all industries and sectors, no other mega trend exerts such high pressure on prices. Digitalization and the endless possibilities of the Internet are leading to significantly higher price transparency, resulting in increased price pressure. Many companies see this as a cause for concern. However, digitalization opens up enormous opportunities in terms of dynamic pricing, price differentiation and innovative price models.
Let’s take as examples Uber’s fantastic price model, or dynamic pricing as seen with Amazon and Google: all impossible without the Internet. We must not forget that the Internet also creates transparency not only in terms of price, but also benefit and value. The user can review almost any product or service. This is the most important prerequisite for value pricing and excellent news for high-quality providers. We are still at the start of a rapidly evolving journey.
Would you say pricing is more of consumer acceptance of a specific figure, rather than what is based on actual cost and delivery of goods and services?
Yes. In all seriousness does any consumer really care what the cost of a product is?
Consumers care about the benefits the product provides. And the benefits can be manifold: different cars for instance can provide convenience, can be fun to drive and thus create joy, and can provide status… Nobody really cares much about the total cost of a car.
Cost is an important input factor for pricing, as it is necessary for companies to allow for their planning and controlling. Many companies, however, still price their products and services mainly or purely on a cost plus margin basis and then align prices with competition, i.e. often giving additional discounts.
The better way for companies to price their products is to define the right target market, measuring how the products or services are perceived relative to competitor products or services. The more value the consumers attribute to the products or services, the more they can charge. To mention some examples where this value pricing method is common, we see this often in the fashion industry, in the automotive industry, in branded pharmaceuticals or in cosmetic products.