Boiling a Frog and Other Management Horrors

7 Reasons Executives Are Underpricing or How You Are Foregoing Margin That Should Be Yours

You may remember the frog in boiling water, a once-trendy metaphor for people and organizational change. The theory stated that if you dropped a frog into boiling water, he’d immediately sense the change and leap out to safety. By contrast, a frog in a pot of water wouldn’t notice a gradual increase in temperature, so would remain in the water until it cooked.

Likewise, people in an organization would tend to remain oblivious to slow changes in their business environment.

I began college as a forestry major, so we inflicted biology lab experiments on plants rather than hoppy life forms. Thus, I cannot offer any empirical observations about the validity of slow frog boiling vs. fast.

When it comes to how sales, marketing, and general management personnel react to price-driven gross margin rate declines, however, I can report that even a swift adverse change can draw complacent or fatalistic reactions. It’s easy for people to convince themselves that a significant drop is nothing to worry about. In such instances, examining paystubs becomes imperative for understanding the gravity of the situation.

Complacency About Pricing and Margins

Although many executives know it’s important to get better at pricing, have ample reason to improve, and can draw on well-developed pricing principles, sub-optimal pricing approaches persist. It appears that there are several reasons for this:

1. Profits to date have been satisfactory, so management felt little impetus to take on pricing improvement.
2. Executives can’t make well-informed corrective decisions when they lack sufficiently detailed information about pricing and profitability by customer, product, geography and transaction.
3. Executives presume that things are better than they actually are, or don’t realize how much improvement is possible.
4. Because price/volume trade-offs are common, executives implicitly believe that all their transactions are right on the bleeding edge of those trade-offs. Or they may assume that, in every instance, a market pricing level exists and dictates what the price needs to be.
5. Executives believe that, while pricing improvement might work for other companies, their own company just isn’t in a position that allows them to charge higher prices without losing volume. This concern is intensified in tough economic times.
6. Other issues seem more urgent, so management prioritizes other business challenges ahead of pricing improvement.
7. While many executives are confident in their ability to carry out cost-cutting, restructuring, mergers, acquisitions, and expansions, pricing improvement can be daunting. They’re often not sure where to begin, how to plan and carry out improvement, what to do to overcome barriers to better pricing, and how much investment of time and money will be required. Couple this with the fear of making pricing mistakes that lose volume, and executives may go for months or years with a vague sense that: We could probably be doing better with our pricing, but we’ll get to it later.

The Need for Change

Companies with these issues are foregoing margin that could be theirs—margin that is urgently needed by their businesses. When margins decline enough, a company won’t earn its cost of capital. Inevitably, they’ll have to cut training, marketing, and R&D budgets, undermining future growth.

Nobody wants that!

Today’s economy challenges every executive to find profit improvement opportunities to offset the numerous risks to profitability. Even if satisfied with their current level of profitability, executives in both publicly and privately held businesses face a continuing stream of new pressures on profitability.

Businesses periodically see inflationary cost pressures; notably in materials, energy, and health insurance, that create an urgent need to raise prices and find productivity gains.

Further, B2B customers apply counter-pressure and some corporate customers employ leveraged purchasing techniques to resist increases and drive down the prices they pay for goods and services. In a slow-growth environment, the internal forces in favor of trading off price and terms to try to increase the probability of getting orders only intensify.

Levels of performance that were good enough in the past aren’t good enough anymore.

Executives must find ways to generate strong earnings to reinvest and to deliver good returns to shareholders. Companies can’t afford to forego margin because of underpricing, and are seldom powerless to improve their position.

The payoff can be large, as I show in The 1% Change That Can Bring Millions Into Your Business. If you know you can improve your pricing but aren’t sure where to begin, take a simple step now. Access my free special report here to get started on your path of improved pricing and increased margins and sales.