Timothy Aeppel wrote a Wall Street Journal article titled Seeking Perfect Prices, CEO Tears Up the Rules dated March 27, 2007.
« For as long as anyone at the 89-year-old company could recall, [Parker Hannifin] used the same simple [cost-plus] formula to determine prices of its 800,000 parts — from heat-resistant seals for jet engines to steel valves that hoist buckets on cherry pickers. Company managers would calculate how much it cost to make and deliver each product and add a flat percentage on top, usually aiming for about 35%. »
« But Mr. Washkewicz thought that Parker, which had revenues of $9.4 billion last year, had stuck itself in a profit-margin rut… And if the company found a way to make a product less expensively, it ultimately cut the product’s price as well. »
« While touring the company’s 225 facilities in 2001, Mr. Washkewicz had an epiphany: Parker had to stop thinking like a widget maker and start thinking like a retailer, determining prices by what a customer is willing to pay rather than what a product costs to make. »
« Now, the company’s return on invested capital has risen from 7% in 2002 to 21% in 2006, putting it on the verge of moving into the top 25% of Mr. Washkewicz’s list comparing Parker with “peer” industrial companies. »
« Changing Parker’s pricing was a complex undertaking. The company has tens of thousands of different types of products, often custom-engineered. The company estimates half of its offerings are specifically made for a single customer. And unlike retailers or airlines, a manufacturer generally can’t see its rivals’ prices. Discussing pricing with competitors is illegal, while published list prices from other manufacturers mean little in industrial markets, where most deals are negotiated. And pricing changes were certain to alienate some customers. »
« “The most common mistake manufacturers made in recent years was listening to experts who told them that they had to differentiate themselves by offering all sorts of service with their products — but then didn’t charge more,” says Mr. Nagle, the partner in charge of strategic pricing at the Monitor Group, a consulting firm based in Cambridge, Mass. Parker’s pricing teams now examine these sort of extra services and attempt to attach values to them. »
« Parker continues finding ways to apply the new approach. The company, for instance, has integrated pricing into its innovation process — aiming to pinpoint and develop products that offer the most potential for price premiums. »
« “Once you start doing this, you never stop,” says Mr. Washkewicz. “It’s a different way of thinking that filters into everything.” »
See also Parker Hannifin and Market Driven Pricing on Mark Graban’s Lean Blog.