CEOs and Prices: Engagement Pays Off
Chief executives who support pricing capabilities see significant gains in firm performance.(originally published by Booz & Company)
Title: CEO Championing of Pricing, Pricing Capabilities, and Firm Performance in Industrial Firms (fee or subscription required)
Authors: Stephan M. Liozu (Case Western Reserve University) and Andreas Hinterhuber (Hinterhuber & Partners)
Publisher: Industrial Marketing Management, vol. 42, no. 4
Date Published: May 2013
Add one more task to the already full list of responsibilities that chief executives have to juggle: Become involved in pricing issues. In fact, the authors of this paper say, “pricing should become a top priority for CEOs.”
The idea isn’t for CEOs to get mired in setting specific prices for products or services their companies sell, but rather for them to underscore the importance of appropriate pricing to firms as a whole and to champion the resources and the marketing and technical skills needed to develop and implement aggressive pricing strategies. Previous research has suggested that the support will give a CEO’s managers “the ability to win price wars, maintain price leadership, and hold a competitive edge in pricing,” the authors note, quoting an earlier study. What their new research has shown, the authors say, is how far-reaching the beneficial effects of this support can be, pointing to the correlations they have found with improvements in a company’s overall organizational capabilities and performance.
The effect of CEOs on numerous aspects of their firm’s performance is, of course, substantial, and one 2008 study found that between 6 and 29 percent of the variance in corporate profitability comes down to a CEO’s strategic actions. Reports also suggest that pricing strategies—such as tracking consumer trends and undercutting competitors’ rates—are increasingly driven or overseen by CEOs.
Still, many chief executives don’t make pricing a priority, or they ignore it altogether. A 2005 study pinpointed senior managers’ lack of support as the largest obstacle to the effective planning of a pricing strategy. This paper is one of the first to look at the other side of the coin, examining the extent to which active CEO championing can influence pricing capabilities and profitability, and which mechanisms are most effective.
The authors surveyed 358 CEOs at large, business-to-business industrial firms around the world, 62 percent of which were based in North America, polling them about their involvement in pricing strategies. CEOs were questioned about their own companies—whether their subordinates employed a price management process, used price-setting tools or software, and trained employees in the area—and about competitors’ practices and market trends. They were also asked about consumers, including the maximum prices customers were willing to pay and their reaction to price elasticity.
In addition, the CEOs provided assessments of their firms’ “collective mindfulness,” that is, their employees’ ability to notice a wide variety of issues, react efficiently, and spot early danger signs. Finally, the CEOs compared their firms’ performance during the past year to that of their competitors on eight fronts, including sales growth and return on investment, allowing the authors to assess companies across contexts, industries, time periods, and economic conditions.
After controlling for the type, age, and size of the companies, the authors found that firms whose CEOs took a purposeful and active role in setting prices had better pricing capabilities, more collective mindfulness, and a higher level of rational decision making. Increased mindfulness and pricing capabilities, in turn, had a positive impact on firm performance.
“Our conclusions suggest that, once top executives realize the importance of pricing and purposefully decide to champion it, the impact on the organization and its performance is significant,” the authors write.
However, contrary to the researchers’ expectations, higher levels of rational decision making, the term they use for basing strategic moves on systematic analyses, had no bearing on firm performance, which suggests that intuition remains an important aspect of marketing strategy. In recent years, researchers have found that an instinctual approach can pay off especially well in times of uncertainty, turbulence, or new economic conditions. Like chess masters or physicians, researchers have suggested, experienced managers develop intuitive skills that should complement, though not necessarily override, analytical or scientific processes. This insight means that CEOs should not take a rigid or fixed approach when they become involved with pricing, but instead remember to trust their gut and the instincts of their top managers.
The authors also note that previous studies on marketing capabilities—of which pricing is one of the most important subsets—have used much narrower survey questions and rating scales. They believe their more comprehensive approach captures all the complex processes and company-wide routines that affect pricing.
“By investing to build pricing capabilities that generate a sustainable and inimitable competitive advantage,” the authors conclude, CEOs who champion pricing “forge [a] shared vision, a collective can-do mentality, and a sense of resilience in the firm that lead to superior levels of organizational efficacy…and superior outcome.”
Firms experience increased performance and organizational capabilities when their CEO takes an active role in supporting the processes used to set the prices of goods and services. CEOs’ involvement in this aspect of marketing also helps foster organizational awareness and more rational decision making.
- Matt Palmquist is a freelance journalist based in Oakland, Calif.