Companies Must Learn to Achieve the Price Advantage (or Pay the Price) (page 1 of 6)

Yet pricing remains misunderstood and poorly managed, according to The Price Advantage, a new book by three consultants at McKinsey & Company. Even executives at highly successful companies may not fully appreciate how small changes in price can lead to large changes in profitability.

Several software programs have been developed in recent years to help companies strengthen their pricing capabilities. But the authors - Michael V. Marn, Eric V. Roegner and Craig C. Zawada - argue that companies can truly achieve the price advantage only by making deep and lasting changes in their organizations. Such a major shift takes time, they say, but the effort can pay big dividends. Wharton marketing professor David J. Reibstein recently spoke to Marn, a partner in McKinsey's Cleveland office, about the major themes that he and his co-authors discuss in the book. Over the years, Marn has developed some of the most widely used analytics for identifying pricing opportunities.

Reibstein: Mike, a good place for us to start is with you defining what you mean by the price advantage.

Marn: When we talk about the price advantage what we mean is not that a company has a product with a low price relative to competition. We've got a much more holistic definition. We think of price advantage as a superior capability to use price as a source of real competitive advantage that at the end of the day makes your company more successful. You'll often hear companies talk about their other advantages. They'll talk about a purchasing advantage or a cost advantage or an innovation advantage or a distribution advantage or a service advantage. You never hear them talking about having a price advantage - that they price better than their competitors do.

What we've observed over the years, and one reason we wrote the book, is that we had so many clients that worked so very hard to create advantages in other areas only to give them away because they didn't have the price advantage, because they didn't know how to price to make sure that the advantages they created really delivered benefit. Why bother to work so very hard to cut your costs if you're just going to pass it on to your customers without taking anything for yourself? Why bother to work as hard to innovate if you're just going to charge the same price for the old product that you're replacing? Why bother working so hard to be a high-service provider if you're going to match the price of a low-service provider in the marketplace? In a lot of ways, the price advantage is more than just an advantage unto itself. It's an advantage that enables companies to realize the benefits of the other advantages they work so hard to create.

Reibstein: My understanding of a cost advantage is that I have lower costs. My understanding of a distribution advantage is that I have easier access to distribution. But you're not talking about a higher price or being able to command a higher price or charge a lower price than the competition.

Marn: No. We're talking about having the capability to come up with the right price more consistently. I would insist that the mistake most companies make, if you look at it over time, is they typically price too low. They have real benefits for which they don't charge appropriately. The error bias is much more toward companies under-pricing. But at the same time, having the price advantage would let you know when you are indeed pricing too high and appropriately adjusting downward when that makes sense.