Think business as usual doesn't cost you money? Check out Parker Hannifin

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by: John Caddell

If you thought cost-plus pricing went out with the Reagan administration, read today's front page Wall Street Journal article on Parker Hannifin Corporation and the efforts by its CEO to overhaul its decades-old pricing approach.

Parker's managers priced their 800,000 products using roughly the same formula: cost plus 35%, whether the product was a commodity or a one-of-a-kind.

According to consultant Tom Nagle (disclosure: my old pricing professor), 60% of industrial companies still price in this manner. Yikes!

With the help of outside consultants (and an iron-willed CEO moving aside internal objections), Parker sorted its products into five buckets from commodity through most differentiated, and raised prices on most. Some commodity products saw their prices lowered.

Possibly the most difficult task was to push the price increases though their distributors and customers objections. But the result was a $200 million increase in operating income and a return on invested capital rising from 7% to 21%.

The lesson for businesses is to look at pricing regularly. Don't let your pricing or your pricing model get stale. And don't be afraid of raising prices when you find a product priced too low. (Perhaps try some deliberate mistakes by raising prices on a small subset of products and see what happens.) The results can be astounding.

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