This may be the year of (the beginning of) economic recovery. So naturally, as C-level executives move from recessionary to recovery management, they will have a laser focus on how to minimize margin leaks and maximize profits. To achieve this business performance nirvana, they can no longer ignore the power of pricing; a strategic pricing plan is directly tied to profitability.
A vast majority of companies today rely simply on the ability of employees to manage a spreadsheet with published prices. But as companies shift their focus from surviving the downturn to thriving, they need to create a strategic pricing organization whose role goes well beyond the compilation of pricing spreadsheets. The reason is that strategic pricing touches all aspects of an organization -- impacting operations, finance, marketing, sales, etc. Pricing is so intricately tied to all levels of the organization that the pricing team has to work well across business silos and must have real expertise and knowledge of market conditions, the competitive landscape and pricing software.
But if pricing is so specialized, why are so many companies relegating the pricing role piecemeal to multiple people within the organization or are limiting its potential? This action is rooted in the perception that pricing is driven solely by market conditions, making us believe there is little room for organizations to proactively control it.
Despite this perception, a slow change is coming about. C-level executives are starting to move past the idea that pricing is based on being captive to market competitors. It is this thinking that has already given rise to the role of pricing managers, who champion the use of strategic pricing to identify and eliminate detrimental pricing practices. There is evidence of this movement in the results of a survey from AMR Research (now Gartner) titled, "Building a Bulletproof Business Case for Pricing Improvement Initiatives." Analysts Noha Tahomy and Heather Keltz interviewed 155 B2B companies, including manufacturers and distributors, about specific organizational changes that must occur to achieve real benefits of pricing. Some 23% of respondents said that an independent pricing organization (outside of sales, marketing and finance) was already or should be established and 23% said the creation of a VP or chief pricing position was or should be established to facilitate pricing management initiatives. Gartner's Michael Dunne also talks about the expected growth of the B2B market for price optimization and management software. Despite the recession, he saw market growth of about 20% in the last year. I believe that as companies work hard to improve margins, the adoption of strategic pricing will continue to grow, especially if there are visionaries who understand the value of pricing and its link to financial performance.
Pricing managers, in essence, are consultants who have a bird's-eye view on market conditions and all areas of the business to help employees and partners identify new and hidden margin opportunities. They do this with the help of pricing software, which analyzes data and arms them with information for strategic decisions. For example, pricing software can uncover current deals that are hurting margins or unveil new ways to improve customer relationships through rebates, discounts and packages.
However, pricing managers are just one part of the equation. While they understand pricing software and serve as the evangelist for strategic pricing, there is still a need to mandate the adoption of pricing information across the organization. It is this very need that will give rise to the role of the chief pricing officer or CPO. As pricing managers educate employees about the importance of pricing and empower them with information to make the right pricing decisions, the CPO will have to champion the change management process, driving employees to use the pricing information to make decisions that impact the bottom line. In this way, the CPO will become the visionary and moral authority for ensuring the adoption of good pricing practices.
As more companies designate CPOs and pricing managers in the coming years, we also will see it give rise to the creation of entire pricing organizations, given the level of strategic acumen needed within pricing. The idea of creating a department dedicated to pricing may seem counterintuitive, given companies are cutting costs across the board. Yet, if companies can nail the vision and process for their pricing strategy, the financial gains will far outweigh the cost of building a team that can focus the organization on driving profitability.
With an eye toward profitability, companies will continue to align business needs with strategic IT purchases in the coming year. With this view, I am convinced we'll see continued adoption of pricing software -- and with it the rise of the CPO and a supporting team since pricing is so inextricably linked to margin optimization and financial performance.
Wilbur Reid is the director of strategic pricing at a Fortune 500 distributor and inventor of a patent-pending pricing process.