Organizational Pricing Considerations PDF

BM2209 ORGANIZATIONAL CONSIDERATIONS ABOUT PRICING Price and Shareholder Value Management should focus on long-term profit maximization. This effort translates to increasing shareholder value or market capitalization. Price is considered the most effective profit driver, s...

BM2209 ORGANIZATIONAL CONSIDERATIONS ABOUT PRICING Price and Shareholder Value Management should focus on long-term profit maximization. This effort translates to increasing shareholder value or market capitalization. Price is considered the most effective profit driver, so it must take on a decisive role in management's efforts to increase shareholder value. It makes the price a vital issue for top management. If a company's pricing drives its earnings, and earnings drive shareholder value, how can a CEO not make pricing one of their highest priorities? Unfortunately, price is not a high priority for many CEOs. According to Simon (2015), Former Microsoft CEO Steve Ballmer said that price is "really important," but a lot of people "under-think it through." Price is not even a high priority for the investment community at large. Though references to price have become more frequent in recent years, you still find them rarely in commentaries, equity analyst reports, or similar documents. One exception is the investor Warren Buffett's comment: "The single most important decision in evaluating a business is pricing power." Even private equity investors, whose typical objective after taking over a company is to increase its value, rarely take advantage of price opportunities. Instead, they typically focus on cutting costs or driving volume growth. Cost-cutting is internal, and one sees the effects directly. Attempts to increase volume do not draw an adverse reaction from customers. But price increases may put customer relationships at risk, and price actions' effects are often indirect. This risk aversion and the perceived lack of control over the outcome make price actions less palatable than cost-cutting and volume growth. The same thinking applies to executives and senior management, where the commitment to pricing is often lacking. Companies earn higher profits when their CEOs and the most senior managers get personally involved in price management. Yet, top managers pay attention to price, is limited in most companies (Simon, 2015, p. 194). Building a Strategic Pricing Organization The following are the fundamental building blocks that companies must consider in constructing a strategic pricing organization: Structure Pricing is a team effort that requires constant cooperation and coordination among several functions, including sales, marketing, product management, and finance. Companies must consider the following factors: The Degree of Centralization - Companies must start by figuring out how centralized or decentralized the powers of their pricing organization should be. The degree of centralization should reflect the extent to which a company's business units have the same customers and competitors and share internal capabilities and assets. The more business units that serve the same customers, face the same rivals, and use standard capabilities and assets, the more critical it is to coordinate pricing decisions across departments. Although centralization enables strategic accounts to negotiate favorable discounts and terms across business units, it also facilitates sharing valuable competitive intelligence among business units. The Organization Structure - The following parameters can organize a pricing group: product family or business segment, customer type, region, or activity performed for customers. Companies should evaluate the pros and cons of each parameter and strike a balance, improving the pricing groups' effectiveness. For example, a leading Asian healthcare provider organized its pricing by payer type— individual, employer, or insurance company—and by region. That matrix helps the company set and manage pricing for its diverse channels and regional markets. 13 Handout 1 *Property of STI  [email protected] Page 1 of 2  BM2209 The Reporting Structure - In some companies, the pricing organization reports directly to the CEO; in others, it reports directly to sales or marketing or is embedded in the finance department. In all companies, the pricing organization should also have a dotted-line reporting relationship to a pricing council, which includes all functional heads with a stake in pricing decisions, such as the leaders of sales, marketing, product management, and finance. A pricing organization that reports to sales or finance can make pricing decisions quickly, but they reflect each function's perspective. Sales usually opt for volume-based pricing, whereas finance pays more attention to margins. A pricing organization must report directly to the company's CEO to elevate the pricing plan and process to the top of the company, making it easier to attract high-caliber pricing talent. Decision Rights and Influence Top management must ensure clear decision rights to create an effective pricing organization. In addition, the organization must be credible and play an active role in everything related to pricing. Intelligent companies follow the three (3) simple rules below: 1. Encourage cross-functional inputs but ensure a single point of accountability for all pricing decisions. 2. Give decision-making authority to those who have pricing knowledge and experience. To react to a competitor's price changes, for instance, a pricing expert must be able to gather competitive intelligence, develop impact scenarios, and craft a response plan. 3. Have distinct responsibilities for the pricing council and the pricing organization but ensure a close working relationship. The pricing organization should consider sharing its responsibility with local leaders in global companies with multiple brands and multiple lines of business. For example, the pricing organization can guide pricing strategy and price setting and supervise compliance, and those on the front can oversee execution. The pricing strategy is developed at the headquarters of global water and space-heating company with a presence in over 25 countries, and performance is left to local market leaders. It helps create a unified strategy yet ensures flexibility in execution. Skills and Capabilities A pricing organization requires people who possess hard and soft skills. Hard skills include gathering and analyzing data, estimating the value of products and services, and translating complex analytics into simple and actionable pricing guidelines for business units and functional teams. Soft skills, on the other hand, include the ability to communicate clear and consistent instructions; develop, lead, and motivate teams; foster customer relationships even with senior leaders; and establish working relationships at all levels of an organization. Team members must also know about the company's products, markets, and customers; the ability to develop pricing that reflects the business strategy; and the skills to identify and evaluate opportunities to change pricing. References: Banerjee, S., Hutchinson, R., Petzke, A., & Pineda, J. (2017). Building a strategic pricing organization. https://www.bcg.com/publications/2017/digital-go-to-market-transformation-building- strategic-pricing-ogranization.aspx Simon, H. (2015). Confessions of the pricing man. Springer International Publishing. 13 Handout 1 *Property of STI  [email protected] Page 2 of 2