Pricing Consulting and the Law of One Price

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Simon-Kucher announced last month that it’s opening an office in Stockholm, Sweden. Aside from its testimony to the strength of the market for pricing consulting in which this firm specializes, by association the move calls to mind the work of Gustav Cassel, a member of the Stockholm school of economic thought of the 1930s and one-time professor at Stockholm University. Cassel developed the purchasing power parity theory of exchange rates. The idea is that exchange rates between currencies should reflect the relative price levels in the respective countries, following the law of one price. Else savvy arbitragers would buy products in the country in which they were cheaper to sell them in the other, thus bidding up the currency in the cheaper market to equalize prices.

Companies traditionally behave as though the law of one price is the law of the land within countries but has no jurisdiction between them. Pricing consulting consequently evolved as a relatively narrow albeit vibrant discipline, with consulting firms orienting their offerings around relatively narrow pricing elasticity studies delivered by local teams along with minor adjustments to country-level performance and workflow management.

One finding of ALM Intelligence’s recent report on the pricing consulting market is that both of these long-held beliefs are being overturned. On the one hand, companies want to get more local with their pricing by differentiating prices within countries by retail location, customer, or time of day. The idea that demand is neither monolithic nor immutable is not revelatory. What’s new is the ability to better measure differences in customers’ willingness to pay both through the availability of data and analytic tools to manipulate those data and more rapidly tailor and deliver offers to capitalize on them.

On the other hand, companies are finding that they can no longer indulge their country level operations with discretion to price with abandon. Not only are they failing to assimilate best practices and learning from across their operations, but they are also foregoing visibility into and control over one of the most important drivers of profitability. At the same time, customers armed with better access to information are less willing to tolerate price differences across geographies even for the sort of non-tradeable services and highly-configured goods that even Cassel exempted from the law of one price.

These changing client beliefs occasion an opportunity for pricing consultants to develop much more expansive and transformative service offerings. But capitalizing on this opportunity is a tall order for an industry not used to coordinating these services on a cross-geography basis or building client capabilities. Now, consultants need both more sophisticated data analytics capabilities and the ability to collaborate much more closely and iteratively with client teams. At the same time, consultants need more integrated global teams that can counterpose the analytics with the ability to engage with clients’ global leadership and contend with their broader operating and governance models.

Nathan Simon is a Director, Lead for Strategy & Operations Consulting Research. To learn more about his latest research title Pricing Strategy & Value Capture Consulting, click here.

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