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What’s the future for pricing?

April 1, 2015

As part of the mounting social debate over ethics and perceived fairness, the UKs Labour Party has announced that suppliers to the National Health Service will not be permitted to make more than 5% profit.

The intent here may be to ensure the exclusion of private business from health services, but that would seem to lead to their inevitable collapse, since there is complete dependency on the private sector for drugs and equipment. So perhaps it is simply a target number, or a way to impose price pressure at a time when current procurement practices have largely stripped the fat from supplier pricing. Most likely, it is just unattainable populist politics.

But behind the headline is a serious issue and that is around the growing questions over ‘permissible’ levels of profit. This is a complex area, since profits – and the need for them – vary dramatically. Commodity businesses, with low costs of entry, constantly struggle to make or maintain margin; many retail sectors are a case in point. Such sectors are often under public and political pressure to mimimize prices, yet often the only ways they can do this are either by cutting service levels or pressuring their own (often small) suppliers. In both cases, they are then criticized by those same people who demanded the lower price. Another example is utilities, where true competition is often difficult to achieve because of the underlying monopoly in infrastructure. Again, prices in this industry are a political football, since everyone needs access. Companies in the energy industry struggle to make profit and are then accused of failing to make investments in the infrastructure and supply network. Today, many energy companies can make more money by helping customers use less energy than they can by selling them the energy itself.

To add to the irony of the situation, recent research discovered that consumers actually accept being ‘ripped off’ by their favorite brands, so long as there is transparency in pricing! It is certainly notable how little pressure there is on a company like Apple, despite its remarkable profitability and cash pile.  This leads us to another aspect of modern pricing, which is the issue of open-book accounting. Certainly it is a focus for Governments. Yet once again, even if socially desirable, the formula is complicated. The definition of an acceptable margin must take account of circumstances. For example, price should bear a direct correlation to risk. It should also link to the potential for innovation and investment. And for a multi-project supplier, should margin be limited on each project, or across the entire portfolio?

One thing seems certain: debates on pricing and on the morality of profit are unlikely to go away. The digital age means that every business has to live with increased visibility and needs to accept that it will face demands for greater transparency and for justifications of its pricing policies.

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