Photo Credit: Nguyen Hung Vu Under Creative Commons 2.0 License
May 6, 2017
When I look back at the accomplishments of the past 7 years that I’m most proud of, the most exciting of them stem from improved corporate pricing process and discipline. On the one hand, being more disciplined is obvious, so why is it so hard? And what goes wrong within most organizations that causes the current state where pricing opportunities exist?
Pricing is fundamentally a commercial/marketing function. However, the analysis and governance of pricing often includes members of other cross-functional teams including data analytics and finance. Ultimately the Sales team must have clear pricing targets and guard rails for their pricing negotiations. Depending on the industry, Legal and Compliance may contribute to understanding what is and what is not permissible. Thus to optimize long-term profits clear direction must be given by Senior Management and clear, consistent communication must take place between these various stakeholders during the building and implementation of the pricing strategy, framework, and implementation phases. Any lack of clarity on the firms pricing direction may cause opportunistic discounting, often at the end of the quarter, and these breaks in discipline can have multi-year implications especially in highly contracted businesses.
The Non-Solution Solution:
Many companies are happy with the status quo. They’d rather continue to invest in R&D, hire more sales people, put more money in marketing than to discipline themselves. This can work. At the same time, if you’re a ‘non-solution’ company, you simply don’t know what you’re missing through more rigorous pricing process and discipline. It could be a 10% lift on profits, it could be much higher.
The wonderful thing about pricing is that it empowers ALL of these investments by making each sale marginally more profitable. Those profits can either be returned to shareholders or poured back into the business. Plus, I argue that, anything that has the potential to cause confusion or enable short-term thinking (remember the example above about closing the quarter with discounting) has the potential to seriously slow your business. And thus the non-solution has the potential to put even Sr. Managements’ jobs at risk through any number of bad outcomes, not only limited to missed quarterly sales.
The Internal Solution (that works!):
So many organizations leave pricing to the commercial team and put the finance team in charge of ‘monitoring the shop’. This works great; IF the commercial team is single-mindedly focused on building the brand and in creating long term value. The Commercial leaders MUST fully understand the pricing dynamics of their industry down to the transaction level. And quarterly reviews of pricing strategy, product pricing dynamics, and notable deal analytics must be performed. All of this is possible and there are numerous examples of companies where price is the main lever of their success and Senior Management ‘lives and dies’ by the margin numbers. Amazon is a good example of this kind of company. Amazon’s stated, public goal of market penetration at the cost of profitability, makes the focus on pricing and customer value easier. There are few companies that have Amazon’s market power and thus most of us must be more price efficient.
The External Solution:
It’s optimal to hire an external consultant or consultancy to assess, benchmark, and improve your pricing process and approval process. Why? How can you be sure that your internal solution works? No doubt your pricing team (you do have a dedicated pricing team, right?) does deal analysis, new product pricing, and important pricing approvals with panache. However, the current system is likely to produce the same results in the future that it does now. To continue to improve your pricing policies and processes, it can help to add in another set of experienced eyes. There are likely imbalances of power between the relevant cross-functional players that will ONLY be worked out through external ‘mediation’. At a minimum, for a very small investment, you get a clean bill of health and the assurance that your policies and practices are world class.
Finally, bringing in external experts frees your internal pricing team to focus on improving the day-to-day pricing operations while providing structure and leadership for the Corporate pricing project. It’s hard to fly the plane while fixing it.
For more information, or to schedule a discussion around Corporate Pricing Policies, Process, and Discipline please email email@example.com