Pricing Governance and Culture Change
The litany of approaches we take in pricing fills bookshelves, but there are two common threads that runs through all companies in their path to getting pricing done right: governance and culture change.
In order for any pricing improvement project to deliver its full potential value, price governance and pricing culture must intersect. Some may want to dismiss this commingling as “too much to take on,” but the results of addressing fundamental questions from both sectors creates the difference between the companies that slog-along and those that thrive.
What constitutes pricing decisions? Beyond list prices and average selling prices, have you included discounts, promotional spending, rebates, and logistical giveaways in you pricing decisions? Who makes which pricing decision? When must pricing decisions rise to the attention of many and when can they remain the domain of a singular function? How are pricing decisions informed? What is the role of sales, marketing, finance, operations, legal, and others in making pricing decisions. And what role does pricing itself play in all of this?
Those are fundamental price governance questions that every company must address itself. The answers will vary between industries, businesses within industries, and even business units within a single corporation. Thought paradigms may be common but their application will lead to individualized results.
And, how does pricing get done? Does pricing report directly to the CEO or indirectly? Should it report to marketing, finance, or even, in those rare cases, possibly sales? What should pricing include within its domain and what should be left to others? How does pricing coordinate activities across product development, marketing communication, operations, finance, and sales?
These too are fundamental questions regarding pricing governance that every company must address individually.
In addressing price governance, one will face the issue of culture change. Moving pricing decisions and responsibilities from a singular function to a coordinated cross-functional effort will relieve some responsibilities while adding others. Still, governance and culture change must be done because no one functional area has all the information needed to make all the pricing decisions, and simple hand-offs tend to lead to missed opportunities, and misalignment of goals and decisions.
As Peter Drucker noted, “culture eats strategy for lunch.”
Without a culture focused on getting the best price on every product and deal, prices tend to fall and pricing decisions get pushed off till the last minute. That dog don’t hunt.
What is the value of something? Why is a feature or benefit included in a product? What is the value of that benefit to the customer? Different customer segments? An individual customer? What is its true economic value to the end customer? How is that value delivered? How is that value communicated? How does a customer perceive that value? How much of that value can be captured through price? How is that value capture shared with channel partners and the value delivery network? How much of that value and price is captured by the company that created it?
Addressing these questions requires a culture that is focused on price and value. For companies that have focused on branding, sales, costs, and such, focusing on value and price will require a mindset change. It may not sound like a big leap, but repeatedly we find it is.
Jennifer Daverio-Brown, Global Pricing Strategy Director of Medtronic, once spoke at a Professional Pricing Society meeting at a European conference on the importance of emotional intelligence in pricing. At the 2018 Professional Pricing Society European Conference, Anna Devialard also spoke on this subject—I think they are on to something. In pricing, we focus on value and value capture. Most other functional areas are focused elsewhere.
- A product manager may have been focused on the technical development of a product in light of some industry trend. Pricing must engage that product manager with their technical and industry trend mindset to show them how their efforts can lead to pricing power and a better value capture.
- A sales manager may be focused on closing a single deal in the face of a competitor. Pricing must engage that sales manager with their customer-focused mindset to show them how that customer will gain value from the offer, and therefore close at a good price.
- A finance or operations person may be focused on managing inventory and costs. Pricing must engage that cost-oriented mindset with their value-mindset and price-to-volume tradeoff understanding to help the company drive the most profit from their decisions.
Pricing must engage the mindset of many different functional areas. In doing so, they demonstrate and develop their emotional intelligence to address their concerns and create alignment towards decisions that lead to higher profitability.
Driving alignment and driving a profit is a cultural orientation towards a value-capture mindset.
Governance along with culture change is core to all profit enhancing pricing transformations. These are not minor issues or technical fixes that can be left to a single functional area to drive, but will require the development of several individual improvements across multiple functional areas, and therefore must require CEO engagement simply because no other role can drive such necessary cross-functional changes. Price governance and culture change are the ties that bind the forward thrust towards reaching that healthy vision: a profitable and sustainable business.