This week, we are talking about pricing. Because of the significant weight that pricing has in the overall performance of a company, we believe this is an important issue the spa industry needs to get better at.
In order to discuss this, we would like to share two interesting articles on pricing published by the McKinsey Quarterly. In the following lines we will discuss the importance of building a solid infrastructure and a long-term strategy regarding this crucial issue.
Effective Pricing Starts with A Solid Infrastructure
The impact that effective pricing can have in the general performance of a company is enormous. According to an article on pricing infrastructure published by McKinsey Quarterly, “sustaining a long-term price advantage may represent roughly 15 to 25 percent of a typical company’s total profits”. In spite of this, companies are not usually seduced by the idea of investing a lot of time and money in the elaboration of a pricing infra-structure.
This common mistake is, however, avoided by successful companies that do understand the importance of having a solid pricing infra-structure. Typically, these companies build this infra-structure by carefully analysing and considering in chronological order pricing processes, organisational aspects, performance management, and systems and tools.
Pricing Decisions Matter
Very often, crucial pricing decisions are consequence of unexpected changes in the market. Instead of leaving these processes with this ‘reactive’ feeling, “companies must first determine which specific pricing decisions are critical to their success and then build robust processes around those decisions”. Moreover, it is important to understand that these decisions are quite different across the entire spectrum of industries.
In order to give the right attention to these decisions, a company must be capable of establishing ownership and accountability regarding pricing. The executive in charge “should be responsible not only for managing day-to-day pricing activities but also for fostering the proactive, continuous-improvement mind-set that separates high-performing pricing organisations from merely good ones“.
Performance management and pricing systems
A solid pricing infra-structure also needs to “have a set of pricing metrics that measure the financial and operational health of pricing across the business”. However, if companies really want to take advantage of this, they need to implement a system of rewards capable of motivating the employees in charge of pricing policy decisions.
Using pricing metrics as the basis for conversations across the organisation, can also boost general performance. Because of their regular occurrence, degree of interaction across multiple levels, and the focus on specific questions, these conversations offer a great potential for companies.
In order for all this to work, companies need to invest time and money on systems that allow them to collect the vital information they need regarding pricing. However, this should be done wisely. According to the McKinsey Quarterly article, there are two principles to consider: “first, understand what information you need and when you need it, and second, move slowly because real business needs for systems and tools are best understood over time. There is no one-size-fits-all answer”. The ultimate goal with pricing systems is that of having access to reliable data for decision-making.
Establishing a Long-Term Pricing Policy
Besides building a pricing strategy, it is also important that a company has some sort of idea about establishing a long-term strategy regarding pricing. In other words, a company must make some sense of pricing during the launch, midlife and late life of a product.
According to a different article published by McKinsey Quarterly on pricing strategy, “companies that master pricing do so across the three phases of a product’s life cycle—launch, midlife, and late life—and make decisions in the context of adjacent products in their portfolios. In this way, these companies ensure that they reap the full rewards of their innovations by creating price advantages for themselves”.
Having said this, we believe the spa industry can also benefit from all the insights we have shared in this article. Building a pricing infra-structure and setting some long-term pricing goals can provide spas and wellness centres with a significant business advantage. It is time for us to take pricing more seriously.