Who is responsible for profit in your company?
Author Tapio Nissilä
Published on September 23rd in categories Blog.
Performance improvement is on the corporate agenda across industries and one major lever for financial success is strategic pricing. Yet, in many companies, pricing and margin responsibility is still not a priority for top management.
One question I often actually discuss with my customers is; who is responsible for the margin?
As I see it, companies spend a lot of time and energy on pricing and people make many pricing related decisions on a daily basis. Companies work hard to set the price right. Typically, these decisions are tactical and often made when working with individual sales opportunities and specific customers. The topic of pricing is hence not undermined, but lacks a strategic approach.
Setting the price
Optimal pricing logic is a strategic question that has many implications from brand perception to the uniqueness of your offering down to margins. Many companies feel that their offerings are not unique and feel that there is little room for value based or premium pricing. Yet as value proposition, offering and pricing are tightly related maybe one should take another look at the value proposition and identify value through the eyes of the customer and then identify drivers for value based pricing.
Getting the price
Pricing is also very much a matter of discipline. Naturally there are a lot of important sales opportunities and special customers where special pricing is required, but the bulk of the sales opportunities and contracts are not strategic. A big part of the pricing challenge is sales people eager to get the deal, even through pushing the price down and hurting the profits in the process. One reason for this is that sales incentives are aligned around volume, not margins. Therefore pricing principles and guidelines should be designed and implemented in order to be able to streamline the price setting among individual customers. Sales people do need the full support of the whole organization when discussing value with customers.
To give an example, in many companies sales people allow exceptions to the payment terms and thereby finance the customer. This type of behavior is actually a very expensive way of giving discounts and should be replaced with other discount tactics with a smaller impact on bottom-line results.
One practical tool for identifying what happens between “list price” and the “pocket price” (what customer’s actually pay, including timing of the payment) is price waterfall analysis. Price waterfall analysis can be used to identify “profit leaks” in the pricing, starting from list price down to actual pocket price.
Organizational alignment
When handing out responsibility for strategic pricing, I see the need for two different types of roles in the organization. The first one can be seen as a “chief pricing architect” who focuses on setting the prices for different offerings and markets. The person in this role should be able to understand the value proposition as well as the value of the offerings, and use that information to design an optimal pricing logic for all offerings. As pricing logic affects the brand, customer relationships and profitability this should be a senior managerial role.
The second, and equally important, role focuses on the “pricing discipline” across the company. This role is responsible for ensuring that marketing, sales and people facing customers act according to the pricing logic agreed upon (also regarding payment terms) and also get proper support when required. Discipline is very important when implementing strategic pricing. An essential part of this role is also to give feedback to the pricing architect and product managers about which strategies work and which don’t. The discussion should have more details to it that just “the price is too high”. Usually this argument rises when sales opportunities are poorly qualified.
In conclusion, although pricing is major lever for better margins and financial performance, companies have not yet included pricing on the top management agenda. As I see it, you most likely have room for more maneuvers that you think both with regard to pricing strategies and responsibilities.