On March 27th an article in the Wall Street Journal highlighted the moves by Parker Hannifin over the past few years to improve the strategic dimension of their pricing practices.
The transformation at Parker during the past 5 years has been outstanding, and has improved operating income by $200 million. The company segmented their customers better, focused on identifying who was most price sensitive and on which products, better identified the values of their products, and eliminated much of the previous cost-plus mentality. The question is – should the CEO, Donald Washkewicz, have given a much detail as he did?
From my perspective, Parker disclosed too much. It seems perfectly fine to tell your shareholders, customers, and competitors that you view pricing as a critical competency and that you intend to move to pricing based on value. It also seems acceptable to tell those same parties that you expect your margins to increase as a result of eliminating wasteful practices. Shareholders and competitors will applaud those moves, and most customers will probably perceive that the comments apply to other customers. (”We do a very good job of benchmarking prices and getting the lowest price”). That is as far as I would go, though. Once a customer is told exactly how prices have been changed, the risk is that they will look much more closely at how their purchases line up against your specific price moves and get angry.
Now, it is likely that most of the moves Parker made were justified. They undoubtedly found products whose prices were too low compared to the alternatives their customers had. They were simply correcting those wastefully low prices. But, part of the pricing equation is the emotion of it all – how the customer perceives your company and your price. Parker seems to have recognized that their customers do business with them because they like the company, the products, the people, etc., but not simply because they like the prices. Parker also recognized that most customers don’t have the time or inclination to check prices on every item. If the customer is paying a little more for some lower volume items, it is not a big deal.
That emotion can work both ways, though. When the customer sees that you are raising prices on specialty items more than 25%, just because it is a specialty item, how likely are they to get angry? What if the customer thought he was paying a fair price or a high price already? The customer may very well still be paying a fair price, but the risk is that now conversations with the customer center much more on price and on whether he/she has been screwed, whereas before publishing the article the conversations were around the value delivered to the customer.
Don’t misinterpret me. I applaud the pricing moves by Parker and would hold them up as good examples of strategic pricing. I just worry that they may have kicked some sleeping dogs.
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