Is Pricing a Core Competency?

I’m not sure whether or not Tom Peters actually coined the term “core competency”, but it certainly took firm root in the business world following publication of his Ur-management tome In Search of Excellence: Lessons from America’s Best Run Companies back in 1982.  The equity bull market that started that same year may have run its course, but core competencies are still with us.  A core competency is supposed to be a unique configuration of intelligence, skills, experience, processes, systems – the things that enable a company to do something really, really well, that are hard for others to replicate and therefore lead to an enduring competitive advantage.   In the business world “advantage” is achieved through profitability, and profitability is achieved through doing things that lead to higher revenues and lower costs.  And the strongest lever the company – any company – has at its disposal to shape its profit line is price.  Given this rather widely understood fact, would not it be logical to assume that a large number of our best-run companies manage pricing as a core competency? Logical, perhaps – but the evidence seems to indicate otherwise.

For all its impact on the bottom line pricing often seems to be more on the periphery of the activity flow than at the center – an outer rather than a core competency, and sometimes not much more than an afterthought – oh, yeah, we need to stick a price on that now… hmmm, let’s see.   There are three commonly-used methods for firms to price their goods and services, and none of them could be considered the basis for a core competency.   The Old Faithful of pricing methodologies is cost-plus: add up a bunch of direct and indirect costs, slap an arbitrary profit margin on top and voila – that’s the price. Then there’s competitor-based pricing, which many people seem to think is several evolutionary legs up from cost-plus but which Michael Douglas’ Wall Street character Gordon Gekko might have called “a dog with a different set of fleas”.  Why should either bean counters in the accounting department or your competitors be the metronome for what you charge your customers?

The third common pricing method perhaps comes closer to hitting the mark, but it still falls short of a core competency.  In fact it is not really a method per se but more an amalgam of several things – gut instinct, trial and error and maybe some back-of-the-envelope elasticity calculations .  Here the intention is right – try to figure out what motivates a customer to want to pay a certain price and then try to meet it – but the delivery is weak.  Even mid-sized companies in retail or distribution businesses face literally millions upon millions of pricing decisions every day – what product to what customer in what location via what marketing message and selling channel?  The permutations are too staggering to handle in any way other than with technology-aided, systematic rigor.  For a long time the tools did not exist to facilitate this – but as more companies become aware of the tools and best-in-class practices evolve (to borrow another one of those indispensable bons mots from Tom Peters) I expect that we’ll see some migration of the pricing discipline from the periphery to the core.

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