As a consultant, I’m often asked in which organization pricing should reside – in sales, marketing or finance. This isn’t a new question, though it’s one I’ve heard debated for years among pricing practitioners. It appears to be emerging as a more urgent issue as executives become acutely aware of pricing’s impact on their bottom line.

In the four scenarios below, I share observations and the common issues of a few simple scenarios I’ve witnessed:

Scenario 1: Equipment, software and personal-care product companies
Pricing in these companies – which focus on quickly delivering new and exciting solutions to a market as a core competency – is typically dictated as a list rate generated by product development or marketing. Sales negotiates the net price using discounts, incentives or rate overrides. Many of these companies have a pricing committee that reviews new product pricing and may also evaluate pricing on big sales opportunities.

The Challenge: In this scenario, one group attempts to articulate the value of their product or service. Ideally, someone has built a business case to justify the investment, based on market value and a price that will be paid. Unfortunately, this isn’t always the case. If there is a known average discount, it may simply be lumped on top of the market-based price to assure no lost-margin opportunity. Over time, flat price increases are added to list prices, and the real meaning behind the price is eventually lost. This only feeds into natural dynamics whereby the sales organization distrusts the product team’s pricing. They must understand the sale and the value of the product or service, which isn’t articulated by the list price, so it goes that management will approve discounting. Many times management does not know what the real market price is, so discount ranges are based on history and margin coverage.

As noted, some of these companies have pricing committees to assure better initial price setting, guidance for sales discounts or to review large-customer deals. The idea goes that representation from across the organization by those who understand pricing will guide better pricing decisions. If a long time passes between funding of a solution and its “go-to-market” timing, pricing should be reevaluated. But, a committee is not the most efficient solution.

Scenario 2: Product-centric, advertising and media companies
Similar to Scenario 1, rates in these companies are set by one team, which may well be a pricing team. The sales team manages net pricing through discounted or negotiated prices, and incentive programs may be created by the team though they may report to marketing, sales, finance or even operations. Ultimately, the final price is still negotiated or adjusted by the sales team or a representative in the field.

The Challenge: This scenario may be viewed as an evolution from the first. Product groups find themselves spending too much time creating price points and responding to bids rather than developing new products. These groups are typically assigned to the periphery of a larger, more influential group, such as marketing, sales or finance – and depending on the group’s focus, decisions will be made from the group’s own business perspective, i.e., a marketing sales or finance bent.

Because pricing is a sub-unit within one of these larger organizations, there also tends to be visibility based on the pricing factors it owns. For example, a pricing team in sales will look at transaction price, rather than through a lens as a holistically understood and managed process.

Scenario 3: Telecom switching, oil-field services, major construction projects, engineered pipeline maintenance and services companies that manage big projects or highly configured solutions.
Pricing in this scenario is developed on a bid-by-bid basis by sales, and cost-threshold coverage is dictated by either a financial or operations organization. A pricing committee may also be common. While there may be a pricing team, the role of pricing is often more tactical and may focus on bid support or understanding costs. The pricing team may report to sales, finance or operations.

The Challenge: In this scenario, product or service costs are typically substantial, based on complex solutions, and complex and time-consuming deliveries. These companies are dominated by brilliant engineers and tech-savvy individuals who focus on operational efficiency, project management and managing costs. These companies are successful because they had a solution to a problem no one could solve or efficiently deliver.

It reminds me of this old quote: “Nothing fails like success.” Once in business, many fail to understand the customers and markets that made them great. The original owners may have had insight or perhaps simply got lucky. The operational delivery engines they mastered are not as understanding of customer needs and what customers value. They solve problems without an orientation toward evaluating real worth.

Despite their process orientation, it never ceases to amaze me that they haven’t thought about pricing as a managed process. They understand sales, billing, budgeting and operational processes, but simply haven’t thought about pricing as an economic process where supply and demand can be evaluated using data. There is no comprehension that pricing can and should be treated as a sustainable and repeatable process.

Scenario 4: Consumer or governmentally regulated companies such as phone companies.
Pricing in this scenario is dictated by a financial organization. While pricing may in their titles, their role is to create rates. The sales team is to sell only at these rates, but deals are still made or price concessions given via free product and other marketing efforts. In these companies, executive management has come up through the finance organization, where the focus has been on financial tracking and cost control.

Only a few simple scenarios are used here to give the gist of what I have witnessed. There are, in reality, many variations, and each would be interesting to ponder. However, these would only be a distraction to the key ideas being shared.

The Challenge: In this scenario, the finance team is responsible for pricing, with a focus on profit delivery. With all due respect, finance folks are best at cost control, building financial models and running efficient operations. I have known many great finance professionals who successfully ventured into pricing roles, and, if you ask them, there is a definitive difference in their perspectives. First and foremost, they view price as a revenue driver – profit is what remains when needs are met at the highest price customers will pay relative to the cost of delivery. There is acceptance that price is dictated by an assessment of prospective clients, based on value relative to competition.

In organizations where finance hasn’t embraced the marketing side of pricing, the finance team focuses on cost factors and margins, and fails to capitalize on the market and economic drivers of price. In other words, by focusing on cost, the company can lose revenue through lost deals and money left on the table by achieving a margin less than the customer would have paid.

Many finance organizations don’t think of pricing as an applied process; instead, it’s viewed as a series of events that drive P&L numbers.

In Summary
We observed the following in all of these scenarios:

Pricing is not an end-to-end process managed with a singular focus.

1. Pricing is not an end-to-end process managed with a singular focus.
2. No one person or team is fully accountable.
3. Pricing decisions can and do become politicized.
4. Net customer pricing becomes inconsistent, with no intelligible logic as to why one customer received one price while another received a different one, which opens opening the door to litigation and lost customers.
5. Focus is on cost coverage and margins.

In these scenarios, pricing isn’t treated as a single process that can and should be managed with a focus toward customers will pay versus what the competitors charge.

I have yet to observe the ideal corporate structure. But, in the ideal world, I would look to a corporate officer who is accountable for understanding and capturing the market values for the company’s offer, grounded in competitive intelligence and solid business sense. This executive’s team would support product development in its business-case creation; drive sales confidence by understanding realistic price ranges for negotiations; and be an ally of the financial team in its quest to drive profits. The ideal pricing team would manage price forecasting and price segmentation, and analyze pricing, markets, customers and financial indicators like there is no tomorrow. The team would implement and manage the tactical and the strategic elements of pricing with a system – invested in by the company – to do all of this.

A pricing mandate is worthy of an executive who is accountable for it, prior to escalation to the Chief Executive Officer. The executive and his team with this mandate must have the authority to pursue pricing without other distracting issues. This is different from sales, marketing, operations or finance directives. It is support for the successful delivery of all other mandates, with a separate focus that requires a disciplined obligation of its own.

The question remains about whether there need to be a Chief Pricing Officer or a formal pricing team that owns the entire pricing process from end to end. Perhaps. I believe there would be a far greater likelihood of getting pricing right. But, the right answer is that whatever your organizational structure, make sure your business actually has one individual accountable for the whole pricing process, without that individual being the CEO. And make sure this pricing-process owner has the full support of the senior executive team to make the unpopular decisions the market’s pricing will dictate.

I’m sure many readers have their own experiences. I welcome your thoughts and ideas.

Patrick Taylor

Most of us accept that if we go to a convenience store late at night, the items we purchase will be priced higher than a major grocery chain during regular hours. Yet when it comes to operating our businesses, many of us are convinced that cost has no bearing on price. 

When we buy something and pay more than we want, we may complain that the cost couldn’t have been that much. In truth, we’re really indicating that we’re offended by our assessment of the seller’s greed. We’re using cost as a baseline indicator of what we think a more equitable price should be, and simply don’t like to admit we’re willing to pay for the incremental value this specific product or service brings us. In this case, we’re conflicted by an assessment of fairness based on cost, and a reality that we’re paying for the benefit of convenience.

So it’s easy to understand why the practice of cost-plus pricing is today’s most common approach to price setting. It seems fair, and it’s relatively easy to determine. Further, we well comprehend that cost has everything to do with profitability – and profit is why most of us are in business – so we spend a fair amount of time and energy managing and tracking our costs. 

We also want to make sure we’re not selling below cost, which would indicate that we’re not competing well, and we’re spending too much on time and materials. It can also help us consider the least amount we’re willing to accept for our products or services. It’s clear that as good business people we must evaluate our costs and margins. This evaluation can be a determination of our willingness to be in a specific customer segment, to produce a particular product, or to serve a certain customer. But, we must not confuse this activity as a price-setting exercise.

Consultants often discuss setting a floor price, which may also be referred to as determining the bottom of a “pricing envelope.” This helps determines the lower limit of a product or service price-range we’ll offer to a market. Let’s be clear though; this isn’t about setting a cost-based price.  

A cost-based price is not a price we ever want to offer the market. It has nothing to do with either what the market will pay – based on perceived value – or how our offer is viewed relative to competitors. Our potential customers are thinking about themselves, wondering about the benefits they’ll get relative to what they’re going to spend; and also asking if our price is cheaper than other offers.

When we dig further into cost, the whole matter of spreading fixed overhead becomes very messy. As my graduate school cost-accounting professor said when she wrapped-up a very long and tedious semester, “No cost-accounting approach is accurate, but it is better than nothing.” 

It’s easy to get sucked into the vortex of which costs are most appropriate to apply. It is also easy to spend energy determining which version of margins we’ll use:  gross margins, contribution margins, net margins, etc. 

At best, understanding costs and margins are introspective and don’t address our would-be customers’ “willingness to pay.” Alternatively, we should think about our bottom-price as the lowest we’ll quote in a given market. 

Our bottom price can be based on the lowest price for which our product or service has sold thus far. Ideally, this lowest price was given to our largest customer or for our largest transaction – the one that bought the largest quantity of units or spent the most money at any one time.

The lowest price could also be based on a contract that guarantees our “best customer” the best price – a “most-favored customer” clause. But, we should determine the lowest price before it’s introduced into a contract. 

In summary, a cost-based price isn’t an indication of what we should charge for our products or services. It provides an understanding of when it’s no longer viable to sell our products to certain customers or market segments. As such, it’s an important activity that every organization must undertake. But, if we want to improve our margins and drive sales revenue, we must focus on creating an understanding of what our prospects will pay for our offerings. And we must understand this with a solid understanding of the price our customer can pay to get that need fulfilled elsewhere.  

Yes, cost-based pricing is almost a natural instinct due to our sense of fairness and the ease with which we can generate numbers. But, if we study our own behavior when it comes to our willingness to pay for items beyond the cost of the goods, e.g., convenience, then we know we should also be able to add value to our products and services, and our costs are irrelevant to our customers.