Proof There Is More To Pricing Than A Cost-Plus Formula
Pricing is important. Really important. And good pricing can elevate a brand, boost sales and increase profits.
But too often small retailers, florists especially, refuse to believe this and cling to an outdated cost-plus pricing model.
This site has offered countless real world examples of pricing that illustrate something much more subtle and sophisticated than the cost-plus model, but this post takes a different approach. Instead of looking at real world pricing examples it looks at the industry that has been built around newer, and more sophisticated, approaches to pricing.
Simon Kucher & Partners
The photo above shows some of the 800 employees of Simon Kucher & Partners – a price consulting firm with 29 offices in 22 countries. They have been described by Bloomberg Businessweek as a "world leader in giving advice to companies on how to price their products" and by the Economist as "the world's leading pricing consultancy".
Their 2014 revenue was reported at €172 million (approximately $183 million). This capped a decade of record growth in which the thirty-year-old firm tripled their revenue.
Georg Tacke, co-CEO
Since our founding we have concentrated on what we know we're good at. Pricing! Nevertheless, no one could predict at the time, that our core area of expertise would become so important to the market. This ‘luck’ played into our hands”.
Consultancy.uk described the dominance of Simon Kucher & Partners like this:
What started off as a niche market has nowadays grown into a multi-billion dollar industry, with sales and marketing executives across the globe actively trying to boost their bottom line results through among others profitability management, pricing optimisation and commercial excellence – all areas for which Simon-Kucher has an established track record.
Take a look at just some of their clients....
Banking & Financial Services
BNP Paribas Cardif
Warner Music Group
You have some of the biggest and most successful companies in the world spending almost $200 million dollars a year just for pricing advice.
Georg Tacke, co-CEO
Over the years, we have remained true to our original positioning and have resisted the temptation to branch out into other areas of consulting.
If successful pricing was as simple as a cost plus formula there would be little need for a pricing consultancy like this. They exist because a more sophisticated approach to pricing is essential to the best and most successful companies.
Revenue Management & Pricing International
Revenue Management and Pricing International is an international professional body for revenue management and pricing professionals. Originally focussed on the travel, tourism and leisure industries the organization has expanded into other areas, like retail, telecommunications and media, which can benefit from the same disciplines. They hold three conferences a year, drawing members from all over the world.
Again none of this is necessary if cost plus pricing is good enough. This organization was founded because of the need to achieve maximum possible revenue from a fixed or ‘perishable’ asset, such as a seat on a plane, hotel accommodation, fresh flowers... or special selling opportunity like Valentine's Day or Mother's Day.
Other Shows & Conventions
RMAPI holds three conventions a year but there are many, many more including the Pricing Excellence and Revenue Management and Pricing series in Europe, the INFORMS Revenue Management and Pricing Section Conference in New York, the HSMAI Revenue Optimization Conference (ROC) in New Orleans... the list goes on.
There are an incredible number of research papers published in the fields of pricing and revenue management. These studies are conducted by some of the most respected members of the most prestigious schools and draw from the fields of psychology, behavioral economics and more.
None of this would be needed if cost-plus was enough. Pricing would be handled solely by accountants. Tremendous resources and energy goes into this work because there is so much to be learned, and even more to be gained.
Your competitors and vendors are already taking advantage of these more sophisticated pricing strategies. Take a look at this job listing from an online flower vendor, placed on the RMAPI website, looking for a pricing professional.
Too often small business owners, and florists in particular, choose to ignore pricing innovation. They stick to cost plus formulas, even as more successful business have moved on to better, and more profitable, approaches.