Is Pricing a CEO Level Issue?
CEO’s are busy people. They manage shareholder expectations. They lead the organization. They define the strategy of the firm. They guide it through mergers, acquisitions, and divestitures. And they are accountable for the financial statements along with the CFO. Given this breadth of responsibility, is pricing really a CEO level issue?
Well, yes. Pricing definitely is a CEO level issue. Prices however, may not be. Let me clarify.
It is unreasonable to expect CEOs to make pricing decisions for every offering and transaction with every customer. And yet, they are responsible for just that.
Consider: At any reasonable sized company, there will be hundreds to millions of customers each buying one to hundreds of offerings a year leading to hundreds to billions of transactions. Given this volume of transactions and pricing decisions, it would take a super-hero to make each and every pricing decision.
But CEOs are responsible for these transactional pricing decisions.
Similarly consider: At most reasonably sized companies, there will be multiple offerings targeted to different customer needs. Each offering needs a price target, preferably that target is commensurate with the value delivered in light of competitive alternatives. Setting these prices implies quantifying benefits, conducting competitive intelligence, and doing market research. CEO’s can’t be expected to conduct the research and analysis necessary for pricing every offering.
But CEOs are responsible for these market level pricing decisions.
For CEO’s to be responsible for an outcome without personally putting in the effort, they must delegate.
As every executive knows, delegating responsibility does not mean relinquishing responsibility. It does mean defining processes to fulfill the responsibility, identifying individuals and teams to execute the responsibility, and monitoring the outcomes, and at times, making the final decision.
Culture, Structure, Routines
CEO’s are responsible for organizing productive operations, and ultimately generating revenue. When it comes to their pricing responsibility, CEO’s manage pricing decisions by defining the culture, structure, and routines necessary for producing sound decisions that align with their strategy.
Leading CEOs, meaning CEOs whose organizational routine outperforms their competitors resulting in economic rents, apply this principle to pricing. They tend to define the culture of pricing decisions around value-based pricing rather than cost-plus or margin-targets. They tend to define an organizational structure that includes a pricing executive. And because pricing decisions impact the entire organization, and specifically have a high impact on sales and marketing activities and financial outcomes, they tend to drive major decisions through a pricing council that includes executives in sales, marketing, finance and other departments as needed.
Value-Based Pricing Framework
What is missing for many CEOs is a framework for driving the organizational strategy regarding pricing. To fulfill this need, we conducted research and produced Pricing Done Right.
Pricing Done Right reveals the Value-Based Pricing Framework (shown below). The Value Based Pricing Framework is a decision management framework. It breaks pricing decisions down into 5 key areas:
Business Strategy: Defining the customers that the company seeks to serve profitably. Understanding the competitors who seek to serve those same customers from the same budget. Developing competitive advantages within the company that will drive customers to purchase profitably from that company and abandon its competitors.
Pricing Strategy: Defining the price structure (sometimes referred to as the pricing model or business model) of the offerings, the price positioning of those offerings, the competitive reaction strategy to competitive price moves, and the pricing organization itself needed to fulfill the business strategy.
Market Pricing: Defining the aspirational and target prices for each offering according to the price of the competitive alternatives adjusted for the value of the benefit differentials.
Price Variance Policy: Defining the conditions under which different discounts, rebates, and credit notes will be extended to different customers and transactions in different products.
Price Execution: Defining the process to ensure the right price is applied to every individual transaction, from quote to invoice, through collections and rebates.
Each of these decision areas are supported through pricing analysis, which implies people, processes, and tools that enable clearer and better pricing decisions. Pricing analysis is the foundation upon which solid pricing decisions are made. They use facts with informed analysis to clarify tradeoffs and enable vetted decisions to be made timely.
This Value-Base Pricing Framework is not just theoretical. It is practical. Academic research indicates that firms that drive pricing decisions through the engagement of sales, marketing, and finance are more profitable than their peers. Experience and direct observation at leading companies across the globe, and across industries, demonstrate that when this decision management framework is applied, performance is driven. It enables companies to respond to downturns better and to capture the value they deliver, better.
CEO’s know they are responsible for pricing. As they embark on improving pricing, they quickly realize they must transform their organization to drive performance. Pricing transformations are a CEO level decision, or at least a business unit leader’s level decision, for no one else can reach across the entire organization and drive changes. The Value-Based Pricing Framework provides a template for driving pricing transformations.
CEO’s, you have a decision to make now. You can chug along with what you have or you can transform your organization towards making better pricing decisions. Before, this transformation and end-goal may have been muddled and unclear. Now, it doesn’t have to be. Recalling the Vincentian question, of St. Vincent DePaul, at whose university I teach: “What must be done?”
Tagged: Amazon, business strategy, culture, MBA, Pricing Done Right, value-based pricing