Sales, Marketing, Finance and Pricing in Price Management
Who should control pricing? I have often claimed that was a bad question. It lacks specificity. For, which pricing decision does the question refer? Competitive positioning? Pricing strategy? List Prices? Price segmentation and commercial policy? Discount Management? Price execution? Can one function really own all these issues alone?
Our own research—that of Homburg, Jensen, and Hahn—as well as research by Hinterhuber and still other works by Liozu, repeatedly indicates that firms which engage sales, marketing finance, and pricing leaders in pricing decisions outperform those that don’t. At this point, we may even call this settled managerial science.
Reviewing the list of pricing decision above, it is clear why pricing needs to engage the broader team, including sales, marketing, finance, and pricing.
But the fact that they should all be engaged in pricing creates a challenge: Anything that is managed by everyone ends up being managed by no one. So how can these different business functions meaningfully contribute to price management?
While the fuller answer has been provided in the Pricing Done Right, here we show how they can work together to manage the price waterfall.
Price Waterfalls, introduced over 20 years ago by Marn et al, are a means of tracking pricing decisions and price variances, and accounting for the impact of various commercial policies. Since its introduction, it has also been expanded to be a managerial tool for guiding pricing decision and decision-making roles.
As a team, sales, marketing, finance, and pricing form the pricing council. They manage the overall price waterfall.
List Prices and Standard Distributor Discounts
The price waterfall starts with a list price. The list price is an aspirational price representing the best price a company expects either end customers, or their existing customers to pay for the offering. If the offering has a clear end customer, the list price should be the suggested price those end customers should be willing to pay. In the price waterfall above, this is noted as the Suggested Retail Price.
Following the list price, there will be numerous discounts, rebates, and other terms. Discounts are on-invoice items. Rebates are off-invoice items paid through credit notes. Along the way, one lands at a target price, invoice price, and finally the pocket price.
The first discount appearing in the above price waterfall is the Standard Distributor Discount. The Standard Distributor Discount is provided to the channel to remunerate partners for their distributional function.
Between the Suggested Retail Price and the Standard Distributor Discount, firms are telling their channel partners how much they believe channel partners should be able to get for the offering and how much the channel partners should pay for the offering at the negotiation starting point. These are the big-picture marketing-strategy issues. They are defined by a value the company aims to deliver to end customers, how much of that value will be captured through price, and how much the company is willing to pay distributors to get that value to end customers.
As marketing strategy issues, decisions on list prices and standard distributor discounts should be led by marketing. Not just a marketing communications team, but a true marketing strategy team that encompasses product, placement, positioning, and price.
Payment and Logistics Terms
The price waterfall ends through considering payment and logistic terms. Payment terms are credit notes extended to customers for early payment or on-time payments. Logistic terms might be credit notes extended for full-truck load deliveries or customer pick-ups. In both cases, they are terms created to encourage a customer not to do something that costs the company money.
As cost avoidance issues, we generally find that finance leaders are best positioned to lead in these decisions.
Finance should know the cost of capital and the costs of delayed payments. As such, they should be able to determine how much the company should be willing to pay for prompt payment.
Similarly, finance, or perhaps logistics, should know the costs of delivery and the actions customers can take to reduce these costs. As such, they should be able to determine how much the company should be willing to pay for reducing logistical burdens.
Planned Discounts and Rebates
The price waterfall also contains a number of planned discounts and rebates. In the price waterfall above, we have grouped these into four categories: strategic discounts, promotional discounts, strategic rebates, and promotional rebates.
The major categorical difference between strategic discounts and rebates and promotional discounts and rebates is their duration. Strategic discounts and rebates are demarked by their long-standing nature as commercial polices that are extended with set terms for a year if not years. Promotional discounts and rebates are demarked by their shorter duration, as in a single season or perhaps a single day.
These planned discounts and rebates will engage issues ranging from customer engagement, new offering launches, market segmentation, and other marketing and sales initiatives. Because of their breadth in goals and focus, I cannot state that any one function should lead the decision making of all of them. However, I can state that the pricing council is held responsible for these planned discounts and rebates. Individuals within the pricing council are responsible for their decisions and actions to drive the company towards its objectives. The overall pricing council are jointly responsible to ensure the policies work as a cohesive whole.
After taking all planned discounts off the list price, one arrives at a target price. The target price is the starting point for any transaction specific price negotiations customers. Between this target price and the invoice price, we have tactical discounts.
The differentiator between tactical discounts and all other forms of price variance is that they are not planned, arising out of customer specific negotiation and the tactics salespeople take on occasion to close profitable sales.
Sales should manage separate tactical discounts. It is the sales department’s decision of when to extend discounts and when to restrain them. They will be held accountable. They should have incentives aligned with their accountability.
But sales do require price guiderails in managing their tactical discounts. The target price should be reasonably achievable. The minimum acceptable price, often called the floor price, should be a price at which the company is willing to walk away from the deal. The pricing council through their policy and planned discounts and rebates should set these targets and floors.
Thus, we learn from examining a simple price waterfall, that pricing isn’t just one person’s decision, rather a team decision. Marketing, sales, and finance all have roles to take in price governance. As for pricing itself, its key role in managing the pricing waterfall is to drive the decisions necessary to meet the marketing and customer engagement objectives and improve profitability. And, when a quarter or a year has passed, pricing must analyze the plan’s objectives against outcomes, and then drive decisions for improvement. In this manner, companies drive continuous improvement. As Deming Cycle admonishes: Plan-Do-Study-Adjust. It’s how winning companies are created through teamwork.