Pricing Optimisation is a central part of your business – if it isn't then it should be! Everything from your marketing and sales to your product and operations should be used to either drive potential customers to make an order or support the loyalty of that customer once they’ve made a purchase. Good communication channels between departments is essential on all issues but if you wish to maximise profit an effective pricing strategy is required with input from all relevant departments to discuss and make decisions on pricing changes. A team effort is required so that you are all on the same pricing page!
Every business will have a slightly different approach to pricing optimisation – and who has overall responsibility for this very important issue within their organisation. If pricing is indeed central in your company, there will be plenty of people with a "finger in the pricing pie" when it comes to a pricing strategy. As a matter of course, Senior Management should be involved in pricing decisions. Undoubtedly members of a pricing team will all have opinions and may well conflict with each other from time to time. This team will therefore require a strong leader.
Who should be in charge of pricing?
The leader of the pricing committee should typically be from the marketing or product teams. Most Marketing or Product Directors have enough experience and authority to run these projects effectively, are trained in the ways of customer development, and are far enough removed from a direct incentive to properly think of the organisation as a whole.
Pricing leaders need to focus on both the customer and the long-term success of the company. Value based pricing requires the collection of data directly from your target customers to determine where they ascribe value and while members of your Sales and Finance departments are certainly capable of this research they may provide self-serving calculations.
There should be one final decision maker and it's either the person in charge of pricing or the business leader – sometimes he/she fulfills both roles.
Who should be on the pricing team?
The Pricing Leader will know that pricing correctly is vital to the overall success of the business, so they will realise the importance of having an effective team effort promoting the right prices and thereby increasing profits.
The pricing team will have representatives from all relevant departments. The purpose of this committee may vary from organisation to organisation but the main focus should be to ensure an equal say on all pricing concerns from the whole organisation – to cover all bases so to speak.
Equal representation is crucial, because each part of even a small company will have a perspective that’s important to the pricing process. Sales will give valued input as to how actual conversations with prospects are progressing, particularly when it comes to quoting a price. They normally work closely with Marketing and Product Development who are of course already heavily involved with pricing issues.
Product Development understands the route to future profit and where new areas of growth in terms of value will start to emerge. Marketing will provide the necessary customer demographic data. Finance should contribute to the discussion on price changes from a budget and growth perspective. It would seem sensible also for the issue of prices to be the concern of the Commercial Director too as they are responsible for creating business proposals and writing bids. They cannot afford to leave any loopholes through which potential business or profit could escape.
Managing your prices
The Pricing Team should be constantly re-evaluating the company pricing strategy and customer demographics. It might take a couple of months to collect all the data required, make decisions on changes, run an impact analysis, and finally, implement that strategy. Don't panic over the amount of time this may take as there may be other pressing priorities – and the pricing committee does not sit full-time. Larger organisations however should have someone pretty much full-time with their eye on pricing strategy. Typically it won't require major overhauls but just small tweaks here and there. You should be making minor changes every three months, and major changes (if required) every six months.
Many organisations employ Pricing Analysts who work closely with the Sales Department. The main duties of Pricing Analysts are to:
review business accounts to ensure accurate pricing
establish criteria to achieve the best customer pricing
help a company's sales force with pricing negotiations
analyse contracts for under performance
eliminate waste or overspending
If you employ Pricing Analysts, a representative should therefore have a seat on the Pricing Committee.
There is no definitive right or wrong answer as to where the pricing function should reside in your business. However, bear in mind that any decisions on prices should be a collective, team effort and that many departments have a valid reason to be consulted and represented on a pricing committee. The overall key, however, is to ensure that pricing is given due attention and focus. If it is an ad hoc process within your organisation, you run the risk of losing margin unnecessarily.
You may also like
- Pricing Strategy: tactics and strategies for pricing with confidence, Warren D. Hamilton, 2014.
- Pricing with Confidence: 10 ways to stop leaving money on the table, Reed K. Holden and Mark Burton, 2014.
- Pricing for profit: how to develop a powerful pricing strategy for your business, Peter Hill, 2013.
- Pricing Strategy: how to price a product, Bill McFarlane, 2012.