Pricing Strategy and Management Capability

Winning  new customers and retaining existing ones is, for the majority of businesses today, a very serious challenge.  In hard times managers are inevitably going to have to look at pricing strategy so what is the connection between it and management capability?

Pricing might be considered to be a major function of marketing but all managers need to have a grasp of the fundamentals of pricing for new product and service development, cost management or internal provision of services.  Even if pricing is not in your immediate remit, you will need to be capable of influencing and managing some aspects of pricing strategy.  You might do it personally but you may need to manage and work with those that do!

Premium pricing is, according to Drucker and Maciariello (2008) almost always an invitation to competitors to enter your market and attack it.  Unless you can genuinely keep competitors out, it is, therefore, always a short term approach.  Drucker and Maciariello go on to say that pricing needs to be linked to utility, the customer’s social and economic reality and the delivery of what represents true value to the customer.

Cox (1997) addresses four pricing strategies:

  1. Cost-plus – cost + profit equals price.
  2. Market led – price is determined by looking at what others are charging.
  3. Marginal cost/contribution pricing – for special orders.
  4. Transfer pricing – for internal markets.

Whichever method is employed, the essential management task is to produce a profit or, at the very least, to mitigate cost.  In the last analysis pricing should facilitate the acquisition and retention of customers and managers need to balance profit objectives with market realities and have a sound working knowledge of how costs work within the organisation.

Focusing on the four main management functions some clear management capabilities in the area of pricing can be drawn out:

Planning:

  • What is current pricing achieving in terms of profit, customer acquisition and retention and market share?  What are the trends?  A capable manager will be crystal clear about the answers to these questions and will have a control mechanism in place to get good data to support conclusions.
  • What is the objective behind considering a change to pricing strategy?  Lack of clarity here could lead to unintended consequences for example stirring competitors into a damaging price war;
  • Are the links between price and customer perceived use value clearly understood?  Pared down products really ought to accompany price reductions and enhanced features and customer value need to be linked to price increases;
  • Is the customer’s economic reality understood and supported by solid data?  Especially in 2012, this is absolutely essential when cash is being hoarded by consumers and customers.

Organising:

  • Who internally has data on price in the market and is there a mechanism for this data to be passed to decision makers?
  • Are front-line sales people clear about their responsibilities when it comes to collecting data about pricing?
  • If front-line staff have some discretion in pricing, is this set out clearly with common sense controls in place?
  • If pricing decisions are delegated are staff aware of the basic cost structures and required margins?
  • Have responsibility levels for pricing been made absolutely clear throughout the organisation?

Leading:

  • Does pricing motivate front-line sales staff?  Too low or too high a price, as perceived by staff, is likely to demotivate them;
  • Do decision makers acknowledge and listen to what staff have to say about pricing or are staff discouraged from commenting?  You don’t need to agree with staff but you will switch them off if you don’t bother to listen with a “we” know best approach;
  • Are staff empowered to make pricing decisions safely?  Increasing individual responsibility in line with capability is a powerful motivator of staff.  Forcing staff into saying – “pricing is not up to me” might not be in your best interests;
  • Have staff been briefed about pricing clearly and unequivocally?  There should be no doubts about the “rules” on pricing.

Controlling:

  • Are the results of pricing decisions measured?
  • Gross margins – are these reported frequently enough to ensure that the price and cost connection is being managed tightly?
  • Is there a competitor surveillance mechanism in place to alert you to changes in competitor pricing behaviour?
  • Is the economic reality of customers being assessed frequently and are results fed in to support pricing strategy decisions?

Pricing is a critical management decision and there are no easy answers.  A balanced approach focusing on planning, organising, leading and controlling will produce better decision making with less risk.

I raise money for the Alzheimer’s Society in the UK – a very small donation at http://www.virginmoneygiving.com/everyonedeservesgoodmanagement would be most appreciated.

References:

Cox, D., (1997), Management of Finance, Osborne Books

Drucker, P. with Maciariello, J., (2008), Management, revised edition, Collins

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