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Is the price right?


Pricing policy is often farmed out, but as margins tighten finance should have a bigger say

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At last summer's Coca-Cola investor conference, the main line of questioning was simple. "Why aren't you raising prices?" Analysts are increasingly probing companies' pricing strategies because that's what investors want to know.

Input costs for raw materials, transport and labour are rising fast – as high as 9.5 percent for 2011, according to Coca-Cola's rival PepsiCo. And they're still rising so subdued prices are squeezing margins. When the bottom line falls – even if a company has other concerns such as market share – investors want to know why.

But there is a logic to keeping prices low right now.

"Consumer spending habits have shifted dramatically over the past year, especially in the UK," says Steve Wilkinson, an advisory partner specialising in pricing at Ernst & Young.

"The amount sold on promotion in supermarkets here is the highest in the world. We know of some leading blue chip retail businesses where 70 to 80 percent of their volume is being sold 'on deal'. That creates a lot of angst both in sales and in finance."

Pricing pressures ranked fourth in last year's global EY survey of risks, rising rapidly from being 'below the radar' in the 2010 report. The change reflects the sudden realisation that below-par economies and hard-up consumers limit options on pricing. Add in higher commodity costs, and it's no wonder pricing risk is soaring up the risk rankings.

Respondents to the survey didn't just flag up their inability to manage prices proactively due to lower spending in their core markets, and emerging market players with lower cost bases entering home markets and regulatory pressures (especially in utilities) were also key factors.

But it's not just external pressures. In an Accenture survey of 1,000 CFOs and marketing chiefs conducted last autumn, 70 percent of respondents reported their companies had an unclear pricing strategy and lacked pricing analytics capabilities; 64 percent said they had inadequate decision support tools. The result is that corporate approaches to pricing are badly co-ordinated and lack discipline.

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Is the price right?
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