Most business’s don’t have a pricing process
I came across this interesting KPMG press release recently that supports our long held view that the majority of business’s (big and small) have no formal price strategy or structured pricing process for managing prices.
Pricing is intrinsically linked to practically every metric of a business’s success: from revenue through to market share and finishing with the all-important profit margins that should form the focus of every business leader. Yet few take the time to craft their pricing process, with even fewer appreciating the science that is price intelligence and the benefits it can deliver to the modern business.
The KPMG article takes a look at why this might be the case and more importantly asks who should be taking ownership and responsibility for this critically important aspect of business.
The outlook for the (many) companies with a lack of a pricing process
A recent survey undertaken by KPMG found that board members across a wide range of industries reported that “poor pricing decisions leave at least 10% profit on the table” (KPMG 2015). Putting this worrying figure aside, the statement itself illustrates a pretty pertinent issue: if companies are well aware of the potential of pricing strategies (or perhaps more pointedly, are aware of the effect of a lack of a pricing strategy) why such a situation is all too common ?
As at least a partial answer to this, according to KPMG’s recent report, is that companies all too frequently consist of departments who look towards each other for pricing direction, with no definitive department charged with the final say upon pricing and certainly no singular manager or owner of the final pricing decision.
Illusions of the marketplace
Going beyond business departments that look to each another for pricing direction, there also seems to be another key reason that leads to a distinct lack of defined pricing processes. Namely, the common misconception that pricing strategy is defined by the market or customer base, in addition to concerns that pricing changes will result in unpredictable outcomes (which may be particularly understandable in what remains a relatively price sensitive post financial crisis market). In our own experience, the lack of a clearly defined process can simply be down to lack of time or resource, often resulting in rushed and ill-informed decisions based on incomplete data and in response to a critical issue, for example – ‘xyz’ product is not selling and we have too much stock, we need to do something quickly.
Price management: Just who should be taking ownership?
“Traditionally, the responsibility for pricing has been shared by the Marketing, Finance and Sales functions. However, this ultimately means that no-one actually leads on pricing and the dialogue across a business is shaped by the various departments’ competing pressures, viewpoints and incentives. In my view, these established contenders to lead on pricing all struggle to do the job, so it’s time for a rethink”.
– Robert Browne, Partner at KPMG
From KPMG’s research has come two definitive recommendations: that a separate pricing function should be instated, and that it should be implemented by a Chief Pricing Officer (CPrO).
Beyond a singular executive however, the KPMG report argues that there are strong arguments for marketing, sales and finance departments to each provide for their insight into pricing direction, with experts making the case for each. Most certainly however, even without expert opinion, it’s quite straightforward to surmise that genuine retail intelligence that can drive profitable pricing comes not from a singular area of knowledge, but from a mix.
“Marketing: With their insight into the product, marketing and customer, pricing naturally sits in this function”.
– Edoardo Poli
“Sales: They are the closest to day-to-day trading and are ultimately responsible for delivering top-line growth”.
– Ben Gaster, KPMG
“Finance: Finance has the best understanding of the impact that pricing decision have on sales and profits”.
– Dan Ng, KPMG
Intelligent pricing: The promise of unparalleled profitability
Price optimisation is an inherently complex task and one that should emerge from both well informed retail intelligence, as well as from company experts who understand best their department. Inherent to this is the correct selection of a pricing strategy and the implementation of a pricing plan, which are tasks that benefit from a singular, well defined position, that of the Chief Pricing Officer (CPrO). All very well if you are a mega-company with a ‘Chief’ for every function – what if you’re a smaller business ?. The title doesn’t really matter, what’s important is that somebody takes responsibility and ownership. Often it will be the busy owner / manager / founder who has a million other things to do. In this scenario it’s even more important to get your act together by developing the price strategy and price process by leveraging technology as much as possible – there are inexpensive price tracking and price management tools out there that can do the heavy lifting and simplify the process.
And for the company that truly commits to creating an intelligent pricing strategy and process, there awaits much in the way of greater profitability, as well as a future that may very well be defined by smarter business decisions.
Insitetrack provides retailers and brands with the essential retail price insight that they need to drive profitability. Our pricing tools eliminate the time and cost consuming manual pricing processes and provide our customers with the data to make fast and informed pricing decisions that improve sales and profitability.