Pricing is central to success. Buyers and sellers can disagree on many things, but at the end of the day they must agree on price. Pricing is where product and service innovation, market segmentation and customer targeting, sales and customer success are connected. With so many pieces in play, there is plenty of room for a lack of alignment. It is the CEO’s job to make sure that critical functions are aligned.
Fundamentally, the CEO has five areas of responsibility when it comes to pricing:
Setting Pricing Strategy
Building Capabilities and Skills
Leading on Ethics and Pricing Fairness
In our engagements with larger clients, one of the first things we do at Ibbaka is to design and conduct a survey on pricing alignment. The goal of these surveys is to test if the company has a coherent pricing strategy that is understood and being executed across the organization. We quite often find lack of alignment between functional groups (product development, marketing, sales, customer success, finance) as well as between leadership teams, middle management and the people actually executing. This lack of alignment can cripple a company. The first place we generally start is with goals, the strategic goals that pricing is meant to contribute to.
Pricing is a powerful lever and can contribute to many goals, but it cannot do everything at once. The CEO and the leadership team are responsible for setting pricing strategy and making sure that the pricing strategy aligns with other strategic priorities. Some of the most common goals of pricing strategy are as follows:
Market scale (grow a market)
Top line revenue
Production volume (generally in order to manage unit costs or to keep utilization rates up)
Unit economics (lifetime value of a customer, customer acquisition costs)
Value to customer
Positioning and differentiation
The CEO needs to understand the connection and trade offs between the different goals, choose the critical goal to which the others will be subservient, as well as make sure that the rest of the leadership is lined up behind this goal and that it is clearly communicated throughout the organization.
Which brings us to alignment. There are natural tensions between different functions, and this is a good thing. A company with no internal tensions is likely a flaccid and directionless beast. But these tensions can become dysfunctional. There is an old saying that ‘sales sees pricing as the revenue prevention function’ and that ‘pricing sees sales as the margin destruction function.’ Sales will point out that without sales there is no margin, and pricing will respond that without margin there will be no company. A balance is needed. These tensions are also surfacing between sales, implementation teams and customer success. Well designed pricing has a role to play in building alignment between sales, implementation and customer success. The CEO and other executive leadership need to make sure that pricing is playing a role to unite the different functions and not set up barriers.
Execution comes once goals have been set and alignment achieved. The CEO is not engaged in pricing execution apart from a few large strategic accounts, but remains responsible. Pricing execution means that the strategy is being used to guide pricing decisions, value is being delivered to customers in line with the price, metrics are being gathered and discounting is managed.
Some simple execution questions the CEO can ask:
How is our strategy implemented in pricing design and value communication?
Is pricing aligned for our target segments?
Is the value being delivered to customers appropriate for what we are charging (are we over or under delivering, why?
What is our discounting discipline and how is it being enforced?
Are we capturing the metrics that will let us evolve and optimize our pricing and make predictions about the future?
Building pricing capabilities should be part of the long term plan. Pricing should be part of the competency model for all of the functions engaged. Building capabilities is a key responsibility of the CEO. It is too important to be left to HR or Operations which will generally under invest in strategic levels like pricing competencies. In an Ibbaka survey of pricing excellence, lack of basic pricing knowledge was identified as one of the key barriers to successful pricing. Organizations like the Professional Pricing Society offer a variety of programs that can be used to build up core competencies in this area.
Ethics and fairness have to frame the entire pricing process. An example of a recent failure is Boeing's decision to charge extra for critical safety feature on the Boeing 737 Max. According to the New York Times in the article Doomed Boeing Jets Lacked 2 Safety Features That Company Sold Only As Extras. The planes that crashed in Ethiopia and Indonesia were not equipped with angle of attack indicators or disagree lights, likely for cost reasons. Should safety equipment be optional on planes? On automobiles? Security is a powerful emotional value driver, but there are risks in using it to drive pricing decisions when lives are at stake.
In our research we have found that pricing fairness influences willingness to pay. Pricing fairness is the result of
Transparency - Is the pricing model and how it is developed understandable?
Consistency - Are similar customers getting similar value receiving similar prices?
Value - Is the value delivered over time aligned with the price paid?
For more on pricing fairness see Is your pricing fair? And why you should care.
Pricing is too important to leave to chance. Many of the companies that come to us have set prices more or less at random or based on their costs. In some cases, pricing is a ‘frozen accident,’ something that was set for some reason in the past and has never been revisited. This is the responsibility of the CEO. Leadership is needed to make sure that there is a clear pricing strategy, that there is alignment around the strategy and that the team is executing. To do this requires an ongoing investment in capability building and a grounding in ethics and fair pricing.