Organizing for Pricing Excellence

What organizational factors make for pricing excellence in a company? Moorman and Day discussed the academic research on the development of excellence in marketing organizations.  We find truths in their work that translate well to the specific field of pricing, one of the four elements of the marketing mix.

One could describe pricing excellence as the superior ability to set prices, price structures, and price variance policy over the lifecycle of offerings and the evolution of market dynamics to improve customer, financial, corporate valuation, and societal outcomes.

Pricing excellence is a continuous process that requires stamina and missionary zeal to develop.  Positive feedback nourishes the pricing organization through reinvestment and affirmation.  Negative feedback may damage the pricing organization.

To achieve pricing excellence, the pricing organization must address its capabilities, configuration, capital, and culture.

• Capabilities: complex bundles of firm-level skills and knowledge to perform pricing tasks and manage market evolutions.
• Configuration: reporting structure, internal team structure, and metrics to shape pricing activities.
• Culture: the values, norms, and behaviors that facilitate a focus on value creation and capture over time.
• Human and Technical Capital: pricing leaders, pricing team, and pricing tools that create, implement, and evaluate the firm’s pricing strategy.

Capabilities

Capabilities rose to the forefront of strategic management in the 80’s under the rubric of the “Resource Based View” of the firm. In this view, the firm’s resources in assets and capabilities are developed over time, perhaps decades. Management’s responsibility is to identify which resources deserve investment to develop a unique and inimitable competitive advantage (or at least hard to replicate).

Building a superior pricing capability tends to progress though five stages:

1. Identify predictive knowledge and skills: selecting the pricing challenge to be addressed and the approach to take to improve price capture.
2. Build knowledge and skills: developing the team and skill sets, both internally and externally, necessary to address the selected pricing challenge.
3. Embed into formal and informal organization processes: executing the approach and learning the details of the process for replication.
4. Integrate to create complementariness: drive pricing towards a cross-organizational function that engages sales, marketing, finance, and other departments as necessary to improve decision making.
5. Build experience and climb learning curve: repeat the process or similar process on a similar pricing challenge.

In pricing, the stages for building pricing capabilities tend to be repeated anew as the company addresses different pricing challenges, such as price variance management, price setting, pricing automation, and pricing strategy.

Configuration

There is much agreement that a strong marketing function contributes to firm value, but that does not fully translate to the pricing function specifically.

Some indicators of the value of having a strong pricing function include:

• The growing tendency of firms to develop the role of a “Chief Pricing Officer” reporting directly to the CEO.
• Work by EJ Bouter in Pricing: The Third Business Skill: Principles of Price Management on the uniqueness of pricing as a business function, distinct from marketing, finance, sales, and operations, the alignment of pricing goals with the Chief Executive Officer’s priorities, and the need for pricing to work across the organization, leading therefore to the necessary role of a Chief Pricing Officer.
• The growth of the Professional Pricing Society itself as well as the increased interest in pricing conferences.

Unfortunately, little formal research has been done on the specific importance of a strong pricing function on firm performance, and many management consultants do not perceive a need for such research.  (I disagree with them but acknowledge their perspective and the lack of formal research to defend my position.)

We have observed a common pattern to pricing team structures. Pricing teams tend to be split between two specific challenges. One team, sometimes referred to as “Price Getters”, focus on price variances, commercial policy, and channel management in an effort to reduce profit leaks and improve price capture.  A second team, sometimes referred to as “Price Setters”, focus on pricing new offerings or managing price evolutions.  Atop this pattern, we have seen pricing people focused on technology use, analytics, and many other functions and skill sets.

The metrics for pricing tend to be the same as those for the CEO. For value focused companies, pricing metrics focus on margins and volume to drive profits. For growth focused companies, pricing metrics are reduced to revenue or some form of customer engagement metric.

Culture

The culture of a pricing organization sometimes refers to the pattern of shared values and beliefs that help individuals understand organizational functioning and provide norms for behavior, and at other times refers to the stories, arrangements, rituals, and language of the organization.

The development of the pricing culture is described in the graphic below. First, firms must attract managers and employees whose curiosity and skills enable them to generate useful insights. Second, leaders must be aligned to drive the changes necessary to leverage the useful insights created through the pricing organization. Once the changes have been implemented, the impact of those changes must be measured (third). These metrics then lead to investment into further development and rewards for success (fourth).  Fifth, the learnings are institutionalized into firm-level knowledge. And sixth, the behaviors become cultural norms and the learnings become a common set of beliefs and stories.

Human and Technical Capital

Human and technical capital are key forces in the development of pricing excellence. This includes pricing leadership and pricing team development.

Human capital tends to be developed along two dimensions in pricing: one, business acumen and ability to work cross-functionally in leadership roles, and two, quantitative acumen and the ability to address complex pricing challenges with clarity.

The development of human capital in pricing remains challenging.  Few universities offer courses specifically in pricing, and even fewer offer courses in pricing analytics and fundamental pricing techniques.  The development of the Certified Pricing Professional coursework and designation, as well as its competing programs, has filled the gap in formal university education for many.

Technical capital refers to the software and tools one can use in pricing.  Software in pricing is used for automating repetitive tasks, executing unique forms of research and analysis, and coordinating pricing decisions across thousands to billions of transactions. Unfortunately, many of the enterprise-level technical solutions are currently too expensive for small and medium sized business and remain in the domain of large companies.  Fortunately, some spot solutions are affordable for almost any company.

Moving Forward

On an academic front, the research by Moorman and Day was informed by the research of hundreds of other researchers over the course of decades. It will take time for pricing to achieve the same academic rigor. Much of this article must be tested via research. First, the process will require the adaptation of a common set of techniques pricing can deploy to address decision challenges much like that described in Pricing Strategy:  Setting Price Levels, Managing Price Discounts, and Establishing Price Structures. Second, more research will need to be developed on the pricing organization itself, testing and adding to the work conducted by Stephan Liozu and others.

On a business front, one should not wait for academia to show the way.  Rather, we have significant evidence that price performance drives company performance.  We also have many experience that demonstrates the capabilities and appropriate boundaries of a pricing organization, and a great deal of anecdotal evidence to support the claim that companies with strong pricing organizations outperform their peers.

For the CEO, it is time to think about building excellence into the pricing organization. This means carefully considering the necessary capabilities, configuration, culture, and capital investments to drive performance.

References:

Christine Moorman & George S. Day, “Organizing for Marketing Excellence”, Journal of Marketing, V 80 (November 2016), pp 6-35.