As a new function it is critical to set it up to succeed. What are the requirements?
First, the function would need complete independence from the departments that have traditionally wielded pricing power.
That would ensure it could gather relevant inputs to lead on pricing but also ensure its decisions are not being skewed by vested interestsor incentives.
I believe that independence will only be meaningful if the head of the pricing function sits on or just below board level: the second pre-condition.
He or she needs the visibility and status among his or her peers on the board and in particular engagementfrom the CEO and CFO. While CEOs cannot be expected to micro-manage pricing decisions, I believe they need to get involved in pricing strategy and key decisions given their effect oncompany performance. For too many organisations, pricing is pushed too far down the hierarchy and companies are all the poorer for it.
Lastly, the company needs to investin their pricing capability – both the insights necessary to make smart pricing decisions and also in hiring and developing the right team with the right skills. In failing to understand thefull complexity of pricing, too many firms think they can take a finance or sales executive and convert them into a pricing strategist. In fact, the pricing team requires some quite specialist skills. They should have a strong grasp of customer and competitor behaviours and trends; have the ability to interpret data and apply statistical techniques, and also be able to manage across organisational boundaries. Time and again, I see companies failing to coordinate pricing decisions acrossthe key functions. The Pricing function would need to work across those silos.
In his article, Mukarram Bhaiji describes the role of the Chief Pricing Officer (CPrO). His article sketches out what this person would be responsible for and how they might operate.
I have a lot of time for Mukarram Bhaiji’s idea and it is a model that a small, but increasing, number of companies are adopting.
However, if creating a wholly separate pricing function is a step too far for some, having them report to Strategy or Marketing is the next best alternative in my view. That way they remain independent from Sales and Finance and can take a longer term view of pricing rather than focus only on short-term trading. If companies want to be ‘strategic’ about pricing, then placing it in a strong Strategy or Marketing function is a good start.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.