Not every company has a pricing department. Here we explain why they are incredibly important players in the price, cost, revenue equation.
Recently, I was on a call with a prospective client who asked the following question:
“What are the primary responsibilities of a pricing division? Is it setting the price or is it controlling discounts?”
Because pricing departments play an important role and many companies are without one—or only have a discount division—I thought it would be a good idea to answer these questions for everyone.
Pricing Divisions: The Guardians of Revenue and Defenders of Value
The pricing department of any company is essentially the guardian of revenue. Think: Revenue – Costs = Profit. Set the right price and you gain revenue. But, to set the price correctly on a regular basis, the pricing division must:
- Understand value.
- Assist in communicating value.
- Defend the value when interacting with customers and prospects.
As you can see, price and revenue are all about value. If a company is not pricing to value, chances are it has a revenue leakage problem.
To avoid leakage, the pricing division should act as a cross-functional, strategic team who:
- Has a deep understanding about the product offering
- Is aware of costs and constraints like the finance team.
- Collaborates with marketing to develop internal and external value messages
- Works side-by-side with sales to sell value and overcome procurement
It’s a big job that shouldn’t be shrugged off.
But companies often deflect pricing and value statements when they consider their product a commodity. The truth is, it doesn’t matter if you are (or think you are) selling a commodity when it comes to value.
Some time ago, Holden Advisors assisted a company that sold construction dirt by helping them better define their value. Is there a better example than dirt to prove that a commodity can be differentiated?
Think about it. When only 30% of B2B buyers make decisions based exclusively on price (noted in Negotiating with Backbone), it’s not surprising the other 70% care about value if they are thoughtfully informed about it. We’ve found this is true even with governments, who are typically price and RFP oriented.
So, who should own value? The pricing team. And, they should be engaged in all matters involving value and its translation to revenue.
Now that we’ve established what the pricing function should do, we need to answer: where should pricing live? Finance? Product? Marketing?
Stay tuned for future discussions about pricing ownership.