What makes a Great CFO when it comes to Pricing? 👨💼 Podcast Ep. 72
Many CFO loves the numbers – and that often includes pricing. We have seen CFOs sign off on all pricing decisions in a business – but is that sustainable.
Would a smart CFO run sales or marketing – usually not!
We ask should a smart CFO run pricing?
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TIME-STAMPED SHOW NOTES
[00:00] Introduction
[00:43] As pricing moves to a value-based strategy, often the CFO cannot understand it that leads to tension between CFO and the pricing team
[02:19] The sales, marketing and pricing need to be working together. The CFO needs to have a meeting regular meetings with pricing to be aware of and support the pricing programs.
[04:42] Joanna discusses how a good pricing executive builds organisational understanding of pricing in a way that people in the organisation including the CFO can understand pricing.
[07:27] Aidan explains that a CFO has other roles in the organisation and why big companies need a pricing expert.
What should a CFO know about pricing?
In the previous episode, we have spoken about what a CEO should know about pricing. In this episode, we’re going to discuss, what a CFO, the Chief Financial Officer in the business should know about pricing? And to some extent, what they should not do?
I think it’s a difficult one when you go on what should a CFO know. Because sometimes the more they know about pricing, the less they are inclined to sort of, the less they understand it. Because it does take a different type.
You’ve got very finance-driven pricing which I think most CFOs are very comfortable with. By that, I mean cost-based pricing. As multiple industries move towards more value-based dynamic pricing and explain that to CFOs that becomes an issue.
Because it’s out of the realms of knowledge. It’s new. It takes a different kind of mindset. And it takes a huge amount of time and effort to learn expertise in the latest pricing strategy.
Often, CFO doesn’t have the time to learn.
They’ve got their own areas and functions to look after. So then when they’ve got this new pricing team in their function because it often is fit under finance. They’re supposed to accept it.
But often deep down they never quite can understand and further what they’re doing. Often this leads, year on year to that sort of tension, not a good tension.
It’s a tension that sort of separates and splinters the pricing team away from the finance team. And also makes the CFO even more uncomfortable about what pricing is.
What I’ll say is sometimes we think just because something is similar or it reminds us of our realm of expertise. We think we can do it. Pricing is one of those areas where everyone has an opinion everyone has a view.
But, how often do you see your CFO having a very strong view and marketing or a very strong view of sales?
To be honest, from my experience is not that frequent. But they often want to have a view and often sometimes are the person completely responsible for pricing.
The reality is if you are pricing but you’re not involved in sales and marketing at all that is a red flag for me. That is a warning signal. Those three departments have to be working together. If they’re not, look clearly there’s something going wrong and going to miss.
A CFO has a very job grip responsibility.
Very many things to be doing. And pricing, if it’s not their expertise if it’s not something they’re focusing on they, should be aware of it certainly.
And it’s something we’ll talk about in future episodes. Whereby senior leaders in the business should be having regular meetings with the pricing. Whoever the person charged pricing is.
They should be having regular meetings. Be aware of stuff, be supporting, be championing in the business and support it.
But we’ve seen many examples for every pricing decision has to be signed off. Every discount, every line has to be signed off by a CFO. But that CFO was not talking to the sales team.
They’re not really aware of the drivers…
- What the customer drivers are?
- What’s really happening out there in the meetings and within negotiations on the websites etc?
So they’re really just looking at it from a cost-plus perspective. And they have this viewpoint that the last and again, this is a generalisation but bear with me.
In many regards, they’re looking at the margins they made last year that might have a strategic idea of boosting margins or maintaining margins.
That often is what is driving them to the back of their mind. That’s perfectly fine. But the reality of it is that has nothing to do with it. The old saying is that in war, your objectives and reality hit each other very quickly and you have to make plans on the foot.
So the reality of it is when you’re in a sales environment. Things can change very quickly.
When you put together your budget last quarter or last year. Then you’re in the market today is completely different.
Let’s be honest, this is 2020 and we’re in the COVID scenario. Things have changed to such an extent that the budget that was put in place and the CFO probably is trying to still maintain it.
Do they have any validity whatsoever?
No, probably not. This is why a lot of companies are coming to us.
Because they know the markets have changed dramatically.
They know that they have to reconnect with their customer…
- To start understanding consumption patterns.
- Understanding the causal drivers of purchasing decisions.
- Understanding what customers value and what different customer groups value.
- And therefore reset their price levels and refine optimise their price-setting process.
Not simply think about price ladders in terms of the cost base and a bit of value-added top. But really think about…
- How do customers are buying?
- What they’re buying?
- Why they’re buying?
And to integrate value within that price setting. Now, as I talk there I’m thinking, how many different types of disciplines have I just touched upon when I’m describing customer-focused pricing?
So yeah, we’ve got finance in there. We’ve got maths, science because we’re doing this scientifically. We’ve got psychology, we’ve got marketing, huge value-based pricing ranges.
When you start saying that, it becomes a daunting prospect. No wonder it takes a good 10 to 15 years to grasp that and also a mindset.
This is why we trust that pricing executive in your business to give you those options. Because you know that they thought through it properly, that they’ve used data, science and rigour.
Ultimately, as a CFO, if you start asking your pricing executive to explain, how they came up with it? You’ll be bombarded with huge amounts of data and research and all this sort of stuff.
What you really want to know is…
- Are they doing it correctly?
- Is it safe? Or, is it growing?
- Is it driving profitable and safe revenue growth?
- Are they achieving the outcomes that you want them to achieve?
- If the answer is yes to that, then that’s pretty good enough.
If you’re interested as a CFO learn how they do it then you need to invest time in that area of expertise.
But it takes time to understand. But this is also what a good pricing executive does. It builds organisational understanding of pricing.
So as you work with your executive pricing team, you let them do what they’re capable of. You’ll start understanding the nuances of how they go about doing. Not in the same way as they do but you’ll start getting it.
That’s the best way to CFO can work with and understand what real pricing is about.
I think I’ve got a couple of comments I’ll make here.
One of the things we see in many big companies is there’s very limited delegation for decision making.
In a lot of corporates, a lot of risk controls and at every turn were second-guessing. And of course, they seem to prevent fraud and prevent incorrect decisions.
But often it means that this person has finally signed off on anything. Whether a purchase or sale or a discount can often be somebody so far removed from the decision-making process. That it’s almost pointless.
I’ve seen businesses where CFOs have to sign off on even smaller purchases for items such as calculators and these sorts of things. The reality of it is, I’ll give two more points.
If you thought about a company such as Apple, which we covered in the previous podcast. If the CFO of Apple was the person actually coming up with the price to sell a new product, a new electronic gadget. You’d question that.
You’d be thinking you have the dominant market research. They have done the customer service analysis. They dug into drivers, spoke to the marketing and understand where stocks up. You’d ask those questions.
Also, ask shouldn’t the CFO of Apple be doing something else? Don’t they have a very responsible job anyway? So that’s the first thing I’d say.
The second thing I would say is in a company, the CFO could be a very talented person.
They could have the complete ability to be the best pricer in the world. But the reality of it is, take the American football example if you’re the quarterback. You could also be such a great athlete that you could be the best wide receiver in the world.
The reality of it is you have to make a choice and you cannot do both. You cannot throw the ball and catch it at the same time.
So the reality of it is once a company gets above a certain size and in small companies in a startup.
Yes, the CFO perfectly well can do this role.
But once you get to a certain size we can’t say this is a rule but there will be examples that will go against this rule. But I would say you almost certainly should have somebody in charge of pricing. Who’s trusted pricing manager, pricing expert, pricing dedicated person.
Once that business we’re talking about a certain number of million dollars in revenue, it becomes perfectly sensible. Obviously, startups, new businesses, all that sort of thing, the CFO can have that role at the beginning.
But over time you have to recognise that skill sets may align, but they don’t always overlap perfectly.
That’s right. I think after about 100 million revenue turnover that’s when you need a dedicated pricing expert there managing things for you.
I think we discussed the size of the pricing team and a previous podcast, so feel free to listen to that. But over 100 million you’ve got a lot of revenues to manage more risk exposure.
As a CFO, you can’t be managing that as well as doing your own job and managing your own teams as well.
You need to trust that you’ve got an expert in the business doing it for you. Then there’s no shame in that. The best leaders are out there ensuring that they’ve got a great team behind them.
Everyone quotes Richard Branson, but he’s the best example of that he always hires people smarter than him in different areas. People that have got strengths he doesn’t ensure that his businesses empire are successful. Also that he can pivot when they’re not successful.
I think Aidan pointed out earlier, we’ve seen a lot of CEOs, not to mention CFOs that end up being the pricing manager.
Whether they knew they were called the CFO, but they actually were doing pricing manager work. That’s an enormous amount of work to be doing on top of actually running and managing your own business and getting the financial outcomes that you need.
You need to start thinking about organisational structure.
- What do you need in your team to drive things forward from a pricing perspective?
- How much margin are you leaving on the table by doing things the same old way and by not putting the right amount of dedicated resources into pricing?
- What you could potentially be earning with the right pricing support under you?
Often all of these sorts of changes come down to the point where you have to accept you’re not the master at certain things. Or indeed you are but you need some help.
Since the old navy ship obviously the captain of the ship is responsible for everything that goes on the boat.
But you have to trust navigators you have to trust other people, the mechanics, etc. and you have to use that expertise. So the reality, I suppose, the great leaders out there are people who recognise that they need other people. They can use other people’s skills.
There’s that old saying that, great leaders surround themselves with people who are better at stuff than they are.
That makes them look good in the long term. When you see a leader who is so what’s the word I’m looking for but almost jealous of authority and keeping everything myself and secretive aspects. Often that sort of business, there are other problems.
I suppose we’ll leave in this it’s almost like a series of red flags. If the CFO was signing off and every pricing move I think let’s put a little red flag up there. Let’s come back and examine. Yeah, that’s it for me today.
Likewise, look, again, feel free this big topic that we’re covering, not an easy place to start with some difficult questions you may have and you just need some extra information.
We’ve got huge amounts of resources on our website, on various pages. But if you just want to go straight to it go to our resources page. Feel free to download guides on organisational design, managing change, understanding what pricing is? What is the latest pricing strategy? All of these questions will be answered on our website on that page, so feel free to download them.
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