The first challenge to effective pricing is accountability, or rather the lack of it.
I frequently talk to executives who cannot articulate their pricing strategy clearly and most admit they don’t know who really has the final say on pricing decisions. Pricing usually comes to the attention of boards when it is already too late.
Historically, the responsibility for pricing has been shared by the Marketing, Finance and Sales functions, and this is often where the problem starts. Too often no-one actually leads on pricing and the dialogue across the organisation is shaped by the various departments’ competing pressures, viewpoints and incentives. None of them are universally the “right home” for pricing in my view – it very much depends on the particular sector and company. That said, some broad conclusions can be drawn and, to that end, I have asked some colleagues to consider the case for each function to take the lead on pricing.
Edoardo Poli presents the case for Marketing. With their insights into the product, market and customer, pricing naturally sits in this function, particularly for consumer-facing and branded firms. Marketing helps design the product and build the brand; it conducts market research on what customers want and what competitors offer; and then sets prices which sales teams take to market.
Unfortunately there is often a disconnect. Marketing might set a price that is based on sound logic and research, but which in practice cannot be achieved by sales teams on the ground. For example, large customers might hold such overwhelming buying power that they dictate prices that the supplier has to accept or competitors may be pricing low to win a major customer and sales have to respond. Is it right also that Marketing should have such a fundamental impact on sales performance through pricing, yet are typically not accountable for results?
So perhaps the solution is for Sales to lead on pricing. That is what Ben Gaster has been considering. Since they are closest to day-to-day trading and are ultimately responsible for delivering top-line growth, sales should lead on pricing and not just the day-to-day setting of prices but the broad direction of travel as well.
Many companies operate with sales in the driving seat on pricing but there is one significant problem: unless incentives are designed cleverly, sales teams inevitably chase volume at the expense of price, with the consequent fallout for profit margins. An eloquent client once said to me, “it’s like leaving a rabbit to guard a field of lettuces”. Can we trust the rabbit with such easy pickings at arms’ reach?
Dan Ng makes a case for Finance, which has a strong claim to lead on pricing. It is inside this function that the pricing dialogue frequently starts, often with a request from the CFO to analyse the effect of pricing decisions on margin performance. The finance function typically possesses the requisite data and skills needed to crunch those numbers.
I can think of a few companies that have an effective pricing team led by finance, but I cannot think of many. Finance’s problem is its distance from the competitive marketplace. Finance remains the backbone of many companies, but they do so too far from the heat of battle to be trusted with pricing decisions. Similarly as in the case of marketing, finance are not on the hook for sales performance and so there is a mismatch of responsibility and accountability.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.