The Role of Pricing in an Organization

December 02, 2016

mountains

Pricing is a C-level topic 
Much too often, pricing is seen as an operational task for experts, however, C-level involvement is crucial if a company wants to achieve sustainable profitable prices for its excellent performance. When C-levels are invol­ved in pricing, their companies generate on average 25 percent higher EBITDA margins than their competitors. An executive’s most important tasks are to give the price strategy a clear direction (e.g. volume growth vs. margins), create a pricing organization and instill a profit-oriented mindset among employees. A model example of this is Porsche. Pricing is one of the highest priorities for its C-levels. They take an active role in pricing thereby con­tributing significantly to an ROS of over 15 percent – an unusually high figure for the industry.

Make sure that pricing is on the agenda of your board meetings and invest one day a month in the topic. Provide a clear price-strategic direction and regularly communicate the importance of pricing.

There is no ONE pricing organization 
Should pricing responsibilities be assigned to the company headquarters or local subsidiaries? Towards the top of the organizational structure or closer to the market? Unfortunately, there is no one-size-fits-all pricing organization – there are guidelines though. The more important pricing is to a company, the further up it should be within the company’s structure. More and more companies are creating small, globally active pricing teams, however, the decision content and authority level of pricing teams greatly depend on a company’s culture and its business areas. In a decentralized corporation with diverse business areas such as 3M, the central pricing team may develop principles, processes and guidelines, but the resulting concrete price decisions are left to the regional organizations or business areas. In a centralized corporation such as Apple, however, it does make sense to make international price decisions out of the headquarters in Cupertino.

Set up a global pricing team ensuring the right balance between market proximity and central function. Give your pricing organization enough power – a toothless tiger is useless.

No monitoring, no success 
It’s one thing to come up with a price strategy. It’s a whole other thing though to embed it into the organization. To ensure success, comprehensive implementation and, above all, systematic monitoring are necessary. Many companies do not follow through on the latter point. Their processes do not allow them, for in­stance, to find out how much of a price increase was actually implemented – a risky way to do pricing. In con­trast, smart companies create transparency by putting together the most important pricing KPIs of their organi­zations in a pricing cockpit. This way, the C-levels can continuously check to see if price targets have been met and react accordingly. Ideally, KPIs should be broken down into regions, product areas and even individual customers. In doing so, they can be used in sales for price steering and, ultimately, in sales remuneration systems. 

Define the most important KPIs to strategically steer pricing. Develop a simple pricing cockpit that reaches the entire company – from the board to the sales team.

Pricing excellence begins in R & D 
For most companies, new products are a way to escape rising price and competitive pressure. However: An astounding 72 percent of all new products miss their profit targets. The main reason for these flops are mistakes in the R & D process. Specifically, the market side, i.e. pricing and marketing, are completely ignored or are factored in much too late in the product develop­ment process. Pricing experts are asked to determine the best price for the product only just before its launch. By then, it’s usually too late. A product configuration that doesn’t meet market needs is hard to fix through the price. If customers do not value the product features, a company cannot charge for them. Ideally, companies get market, pricing and sales experts involved from day one in the innovation process. This is the only way to factor in customers’ willingness to pay for features during product development.

Expand your R & D teams to include market and pricing experts; regularly measure product value and willingness to pay throughout the R & D process. Encourage your teams to kill features or even entire product ideas if needed.