A. O. Smith Pricing Spineometer: 2 of 5 Vertebrae

A. O. Smith, a water heater, boiler, and treatment company, had a negative FY 2024. Revenue fell 1% to $3.8 billion, and operating profit fell 7% to $707 million over the last year.

A review of A. O. Smith’s 30 January and 29 April 2025 earnings calls and associated financial reports provided insight regarding the importance of pricing on performance.

(Full disclosure: this author has Rheem furnaces and Bradford White water heaters produced by A. O. Smith.)

FACTS FROM EARNINGS CALL AND ANNUAL REPORT

Kevin Wheeler, Chairman and retiring CEO of A. O. Smith, discussed pricing in his annual report. For North America, he reported “water heater sales decreased 1% in 2024, as pricing benefits were more than offset by lower volumes.” For the rest of the world, he reported a 4% price decrease due to the weak economy in China.

Chuck Lauber, CFO of A. O. Smith, echoed these claims, stating in the January 2025 call, “Higher boiler and water treatment sales and the benefits of pricing actions were more than offset by lower water heater volumes in North America, as well as lower sales in China.”

A. O. Smith has historically had a reactionary approach to cost increases rather than a proactive approach. Moreover, their price management strategy appears to have been constant for a number of years. Kevin Wheeler stated in the January 2025 call, “how we manage pricing hasn’t changed for multiple years. And as I mentioned before, one of the things that we try to do with our customers is we have credibility because we take the increases before we pass it on to them. And we also want it to the market very closely so that we know when to take those actions.”

Steve Shafer, COO and future CEO, discussed A. O. Smith’s tariff response in their April 2025 call. He states, “In North America, in response to tariff cost increases as well as higher steel and other input costs, we have announced price increases of an average range of 6% to 9% on most of our water heater products. We have also announced price increases on our other product categories. Because of the uncertainty of the tariff environment, we have not included in our announced pricing in our top-line guidance.”

Steve Shafer also discussed a potential surge in purchases during the first quarter as buyers sought to avoid potential tariff-induced price increases. He stated in their April 2025 call, “While we are very pleased with our first quarter growth of 10%, we believe we may have benefited from a minimal amount of pre-buy from price increases to be implemented in the second quarter.”

And the approach to pricing appears to have been accelerated. Charles Lauber stated in the April 2025 call, “on the pricing announcements, they have been made and they’re out in the marketplace, and we’ve been communicating with our customers around that. So that is a step we’ve already taken.”

VALUE-BASED PRICING FRAMEWORK IMPLIED PRICING REQUIREMENTS

Of the 12,700 employees at A. O. Smith, industry benchmarks suggest 15 to 40 professionals focused on pricing.

1. A. O. Smith focuses on energy-efficient product offerings with a short payback period through energy savings and sells in highly competitive markets. This may be indicative of the industry pricing well below its full consumer benefits, where no individual competitor has a significant benefit differential. If so, this is a strong example of the prisoner’s dilemma from game theory applied to industry pricing dynamics.
2. A. O. Smith sells through wholesale, retail, and maintenance, repair, and operations (MRO) channels, including Lowe’s and Amazon. A complex channel strategy requires price management to deliver channel alignment and reduce horizontal and vertical channel conflicts.
3. Price negotiations with customers benefit from AI-driven price guidance at the customer, segment, and product level. This would require both pricing professionals and technology, such as Signy by Wiglaf Pricing, for proper execution.
4. Pricing at the retail level requires competitive price knowledge and rapid price updates. Price research services such as QuickLizard, PriceBeam, or AcuityPricing are routinely used to provide competitive intelligence. Price execution services such as FlintFox would enable quicker price response.
5. 77% of A. O. Smith’s sales are in North America, with the remaining 23% primarily from China, though also including India and the European Union. Differences in cultural and market conditions between geographies would necessitate differences in commercial policy concerning discounts, rebates, and promotions. Software by Enable may be used for rebate management to improve commercial incentive alignment and customer communication.
6. Deteriorating trade relations between China and the United States would have a material impact on A. O. Smith’s performance. In light of recent tariff wars, we would expect A. O. Smith to respond with both a reduced production volume and a higher price level. Applied economics would help A. O. Smith management navigate these treacherous economic conditions. Applied economists would also be useful for responding to potential legislative changes that reduce natural gas usage in residential properties, the property slump in China, and other economic shocks.
7. Steel is a primary input into A. O. Smith’s offering. Tariffs on steel and general steel cost fluctuations would put A. O. Smith’s profitability at risk on any long-term contract supply agreements. A. O. Smith reports that some customers are obliged to accept price changes based on steel price fluctuation. Their annual report also mentions fluctuating logistics costs. Index-Based Pricing would be the standard approach to addressing large customers with long-term contracts and volatile input costs. Large home builders such as Lennar, D.R. Horton, Toll Brothers, KB Home, and Pulte Group may be appropriate candidates for this price structure.
8. Managing price changes induced by steel and tariff fluctuations would benefit from defining industry-level elasticity distinct from brand elasticity.

OBSERVED PRICING CAPABILITY

Research into the investment by A. O. Smith in pricing yielded underwhelming results.

1. The pricing team size is below but near industry benchmarks.
2. Specialist, managers, and a director of pricing (currently earning an MBA) could be identified at A. O. Smith.
3. Pricing responsibility is distributed far beyond the pricing team. While it appears that the pricing team is managing pricing and competitive analysis, pricing decisions such as product pricing, price negotiation, and price planning are suspected to be managed by product, sales, and finance, respectively.
4. A. O. Smith has no open positions in pricing as of May 2025.

Given the importance and capability of pricing at A. O. Smith as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of May 2025.

A. O. Smith Pricing Spineometer: 2 out of 5 Vertebrae.

Pricing is clearly of importance to senior executives at A. O. Smith, yet the development of a proper pricing function is below expectations. Perhaps Steve Shafer will initiate a pricing transformation as he is elevated to the CEO role.

AOS (A. O. Smith Corporation) fell from 68 to 65 between the day prior and one week after their January 30 earnings call. FY 2025 revenue of $3.8 billion with an 18% operating margin and P/E ratio near 20.

For FY 2024, a 1% improvement in price would yield a 5.4% improvement in operating profits, holding all else constant at A. O. Smith.