Most businesses 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 businesses (big and small) have no formal price strategy or structured pricing process for managing prices.
Pricing is inextricably linked to almost every metric of a company’s success, from revenue to market share to the all-important profit margins that should be the focus of every business leader. Yet few take the time to craft their pricing process, with even fewer appreciating the science of pricing intelligence and the benefits it can deliver to 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 crucial aspect of a business.
The outlook for (many) companies with a lack of a pricing process
According to a recent survey by KPMG, board members from a variety 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 is such a situation all too common?
At least a partial answer to this, according to KPMG’s recent report, is that companies all too frequently consist of departments that look towards each other for pricing direction, with no definitive department in charge of the final say on pricing and certainly no single manager or owner of the final pricing decision.
Illusions of the marketplace
Going beyond business departments that look to each other 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 due to a lack of time or resources, 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 act 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 opinion, 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
Two definitive recommendations have emerged from KPMG’s research: establish a separate pricing function, and have a Chief Pricing Officer (CPrO) implement it.
Beyond a single executive, however, the KPMG report argues that there are strong arguments for marketing, sales, and finance departments to each provide 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 single area of knowledge but from a mix.
“Marketing: With their insight into the product, marketing and customer, pricing naturally sits in this function”.
“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 optimization is an inherently complex task and one that should emerge from both well-informed retail intelligence and company experts who understand their department the best. This includes the proper selection of a pricing strategy and the implementation of a pricing plan, both of which require a single, 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 matters is that somebody must take 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 pricing strategy and pricing process by leveraging technology as much as possible, with 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 they need to drive profitability. Our pricing tools eliminate time-consuming and costly manual pricing processes and provide our customers with the data they need to make quick and informed pricing decisions that boost sales and profitability.