Going for Growth: The Role of Price and Cost in Driving High Performance in a Volatile Global Economy

During the recent recession, companies across the board slashed costs in response to a dramatic slowdown in demand. Now, as growth begins to return to the agenda, companies are considering the following question: How to reignite growth in a time of uneven demand while continuing to make intelligent and appropriate reductions in cost to strengthen profitability?

In Accenture’s experience, the answer lies in aligning price and costs. By developing a deep understanding of how its different customers perceive value in its offerings, and then using this insight to vary its cost structure so that costs can remain in sync with revenue and value, a company is better positioned to grow profitability.

To explore this issue further, Accenture surveyed 1,000 executives in 12 countries and eight industries between November 2010 and January 2011.

• A majority of executives (56 percent) think their revenue will grow only by 5 percent or less in the next 18 months.
  
  
• Twenty-seven percent of companies have adequate cash on hand to finance current operations, while 47 percent said they have optimal cash for delivering on their strategy. Twenty-two percent had excess cash.
  
  
• Service (54 percent), innovation/product differentiation (53 percent) and price (51 percent) are the primary levers for cost advantage.
  
  
• Price optimization was one of the three most important strategic priorities for the past 18 months for nearly 75 percent. But only one-third of companies surveyed ranked their pricing capabilities as “sophisticated.”
  
  
• Only 41 percent of executives said that analytics was core to their price optimization programs, while it was one of several inputs for 52 percent.
  
  
• Eighty-two percent of executives globally said their company had undertaken a significant effort to reduce costs in the past 18 months.
  
  
• Only about half the executives said their companies understood the cost to serve in great detail and manage their service levels based on customer type or segment.

• Most companies are planning for growth, but that growth is likely to be modest.
  
  
• When it comes to pricing, companies tend to most frequently use actions by competitors and the balance between supply and demand as inputs in setting prices. Comparatively fewer consider value-based and cost-plus strategies.
  
  
• Price optimization was one of the three most important strategic priorities in the past 18 months for seven in 10 companies in our survey, but an equal percentage of companies do not have what Accenture would consider to be sophisticated pricing capabilities.
  
  
• Companies face a wide range of challenges in optimizing pricing, including sales execution, inadequate pricing analytics, unclear pricing strategy, inadequate decision support/ analytics, and governance and accountability incentives.
  
  
• Companies believe there are still opportunities to capture in cost reduction and, thus, more cost cutting is planned for the next six months (with strategic sourcing and enterprise rationalization being the most popular cost management actions).

To capitalize on growth opportunities, companies will need to address some shortcomings in their pricing capabilities.

• Pricing capabilities need to be integrated into key tools across the organization.
  
  
• Many roles and functions are involved in the pricing process: governance must be put in place and central versus local decision-making must be balanced.
  
  
• Companies need to use value-based pricing more actively, and develop a “design to price” mindset.
  
  
• Companies can only get so far by operating cost (or supply) and pricing (or demand) as separate levers. To achieve robust, scalable growth means understanding how to use both levers together.

Raising prices cannot work in the current economic climate, while reducing costs can ultimately affect a company’s ability to grow. Accenture believes the companies that are best positioned to capitalize on the growth opportunities today are those that use insights from the demand side to drive appropriate cost-reduction efforts on the supply side. These enterprises will be the ones setting the agenda for competitive differentiation, profitable growth and, ultimately, high performance in a volatile world.