Fair Pricing Policy: Understanding Price Governance & Why It Often Fails
Just how successful is your organisation when it comes to implementing a fair pricing policy or price rise programme? If you’re like most companies that aren’t doing so well, you should know that:
- 90% of organisations fail in their first efforts toward price data governance
- only 1 in 5 of your employees think your pricing policy is effective at driving results
- A lack of variation in pricing across SKUs is the no. 1 reason price rises programme fail
Table of Contents:
Fair Pricing Policy: Why it All Comes Down to Price Governance
Price governance is the catalyst, which brings a fair pricing policy and strategy to life. It talks about the rules of fair pricing policy and the mechanisms that keep price policy execution moving forward in the same direction. Price governance includes all the key aspects of a fair pricing policy from roles and responsibilities, decision-making authority, price setting processes, data IT processes, workflows, implementation, discount sign off procedures and much more.
Some executives argue that a business needs to have tight governance and price controls to establish a fair pricing policy whereas others argue for a more flexible and iterative approach.
Pricing strategy execution is more than just reacting to market conditions, such as reducing pricing because competitors have reduced their prices. Instead, it needs more thorough planning and consideration of customers, competitors, and company goals. Furthermore, pricing policy considerations depend on whether a company is a new market player or an established firm.
Wherever you stand on price governance and controls, best-in-class price governance can help you:
- prevent poor pricing decision-making
- reduce pricing chaos
- build consensus for your pricing policy
- eliminate operations that lead to margin loss
- drive 20% higher return on assets
So, in this article, we will discuss how to create best in class price governance to support your pricing policy. We’ll also share tips on how to avoid common breakdowns in price governance that lead to implementation breakdown and bottlenecks in pricing policy decision making. We strongly believe that as price governance becomes more mature in Australian businesses, it’ll become less bureaucratic and more profitable.
By the end of this article, you will know how to set a fair pricing policy decision-making capability without getting bogged down in endless meetings, politics, reporting, and red tape. But, first, let’s take a look at how you can establish a fair pricing policy in your business.
Importance of price governance
The importance of price governance is that it achieves successful outcomes and behaviours that drive your pricing policy. The reason you set pricing policies is because you want people to understand the important role they play in achieving these outcomes.
Another key aspect of pricing policy is technology and systems management. In fact, the relationship between governance and effective value creation of price technological investments is often cited as the best way to achieve excellence in the management of pricing. So expect to spend a good deal of time thinking and debating systems and toolsets as you develop your pricing policy.
To successfully implement your pricing policy, a pricing manager has to lead and execute new governance processes and tasks. This will mean executing governance programmes with discipline and creativity. Governance is not always a straight line though. So, you’ll need someone who can think laterally too, especially when your price policy isn’t working as well as you thought it would.
Establishing a fair pricing policy
Establishing a fair pricing policy comes down to price governance. It’s the responsibility of management, pricing leader, and stakeholders to think through the right price policy guidelines clearly. It’s also critically important to define roles coherently, so that every stakeholder involved in pricing decisions knows their part and maintains the rules of pricing to the best effect.
Leading organisations that position price governance well, tend to have fewer mechanisms controlling their price policy. In fact, they have simpler processes than most businesses because they’ve learned to work together with a shared understanding of their pricing policy and key business priorities.
On the other hand, less mature organisations (ones with limited pricing capability) often need more price controls to create focus and deliver business results. They possess a common culture of compliance rather than commitment driving their standard pricing policy. They also experience a series of breakdowns in decision making authority, usually in discounting and sign-off procedures. Then, there is limited awareness and understanding of proper support for new pricing policies.
Establishing Better Price Governance in Fair Pricing Policy
- It is like a sports team. An athletic team cannot play unless the players master their positions. The gameplay falters when individuals do not fit their roles. Hence, its success depends on the governance roles that key stakeholders take. This means that the right individuals in the organisation must have specific skillsets and goals that help them create a fair pricing policy.
- You need the right skillsets in the team. Leading on from the last point, your ability to fill a recommended role depends on an individual’s skills, interests, and the enterprise environment. Some people excel, while others perform adequately, and some can do better. Thus, if current roles do not match the tool’s recommendations and governance starts to deliver limited results, a team leader should make adjustments to the decision-making committee.
- Communication is key. Integrated communication is important in selecting the right input for price governance. In addition, to facilitate and communicate pricing policy decisions more effectively, you’ll need governance communications to emphasise agreed business outcome metrics. This can include a prioritisation scoring systems and milestone metrics throughout your pricing policy’s life cycle.
- Systems and tools are vital. Pricing leaders should create an inventory of their communication tools when compliance to pricing policy starts to crumble. Part of the process includes revisiting governance decisions that aren’t producing intended success and re-writing sign off procedures that delay decision making are .
A fair price policy without a plan is simply a wish
Price governance enables the entire business to be positively involved in strategic price management, including all the benefits and outcomes of the programme. However, you may find your commercial teams fighting against change, believing that price governance is another obstacle in their way to generate more sales. So, here are some tips to help pricing teams get the business back on track and the commercial team on side:
- Alignment and responsiveness: Price governance facilitates best-in-class pricing portfolio management. Whereas a fair price policy brings various elements of a pricing programme together with key business objectives, guidelines and procedures. This helps managers improve their responsiveness to challenges, and manage current and future revenue opportunities.
- Objective decision making: Price governance allows leadership to improve the management and control of pricing strategies in the business.
- Resource balancing: Proper management of essential resources enables control in planning and organising a pricing policy committee. This ensures adequate support is available for current and future profit margins.
- Organisational risk management: Proactive risk management ensures that pricing managers and leaders are aware of the risk associated with any pricing option proposed. This includes go-to-market strategies being rolled out or tested in different segments; and a plan to implement risk mitigation as required.
- Execution and enforcement: Governance in pricing provides a framework to manage all forecasting, supply, and demand. A pricing policy document through a single point of reference is how all initiatives are prioritised and fulfilled. It also allows standardising technology platforms and helps managers to use systems that make more informed pricing decisions.
- Accountability: Effective governance is about accountability. This enables managers to enforce the responsibilities that keep a pricing programme moving and on track.
Take these considerations into account when formulating a pricing policy:
1. Think about Your Competitive Situation
Any fair pricing policy is created in light of the competitive situation you operate in. Whether the business is facing perfect or imperfect competition – you need to consider both.
2. Clearly Articulate Your Profit and Sales Goals
The business uses its pricing policy to maximise profits in the safest way possible. In all cases, sales, operations, and finance teams should know what metrics and goals mean. These metrics must be defined how they help price policies drive more profits.
3. Consider The Long term Financial Health of The Business
Generally, businesses hold back on charging a high price for their products and undersell their offers. They believe low prices generate more volume and revenue for the business, or more competition in the industry. But very often, this is not the case – as low prices don’t always guarantee an increase in unit sales. A pricing policy is there to remind you to think about the risks of short term planning while keeping an eye on the long term welfare of the company.
4. Add Flexibility Into Your Price Governance
Pricing policies should be flexible enough to meet changes in economic conditions. If a business is selling its product in a highly competitive market, there is little room for pricing discretion. In other words, prices should be flexible to take care of cyclical variations.
5. Carefully Consider Regulations / Government Policy
The government may have issued new regulations and guidelines on pricing to ensure firms play within a certain price band. Particularly, in the industry of banks, insurance, and financial services. Often, the government prefers to control the prices of essential commodities to protect consumers.
6. Remind Yourself Daily Of The Business’ Overall Goals & Objectives
Take note, pricing is not an end in itself but a means to an end. Therefore, the basic guidelines to pricing come from the company’s overall goals. Specifically, objectives that relate to market share, rate of growth, maintenance of control, and profit. Pricing policy should never be in conflict with other policies and practices.
7. Consider Price Sensitivity
Different factors that give rise to price change insensitivity are often within the consumer behaviour, nature of your products, impact of marketing efforts, and a continuous role of service after sales. Oftentimes, businessmen tend to exaggerate the significance of price sensitivity and ignore key identifiable elements that they tend to minimise.
8. Standardise Your Pricing Process
A business may have to undergo many pricing decisions. For example, if the data and cost are based on conjecture, it must rely on some pricing formula. Once again, there is more room for pricing discretion for products that are sold in a less competitive market.
In effect, price and business intelligence and performance dashboards can significantly improve forecasting and price policy decisions. Organisations are better positioned to counter competitive price leadership and market changes more effectively.
Price governance is what really brings your pricing policy to life. Without it, a fair pricing policy is just a document.
As you can imagine, price governance is a complex system of several moving pieces. It involves management, the pricing team and key stakeholders must agree on what a fair pricing policy is.
But very often agreeing (or disagreeing) is where pricing policy development and execution fails. Especially in businesses where there is limited consensus and no management alignment on what the proper strategy should be.
Pricing Policy: How to Build a Pricing Capability that Boosts Revenue & Profitability
Written by Joanna Wells, Author of TeamBuilder360 and Director of Taylor Wells – specialist at building pricing teams – a specialist advisory firm that has developed a specialist price recruitment program for pricing policy, commercial and sales management.
A global MedTech business based in Sydney was experiencing substantial margin pressure. Despite solid revenue growth over the past 3 years, earnings growth was flat.
A detailed sales and pricing policy analysis identified several sources for this margin decline:
- Excessive discounting to maintain market share and protect sales volume.
- More customers and providers were demanding that the price of their product was directly related to the value that it provided.
- Low-cost providers were rapidly expanding their global footprints and taking market share.
- Multi-disciplinary buying teams were replacing individual surgeon buyers.
- Buyers were more focused than ever before on containing their costs.
The MedTech business had no plans to address these new commercial dynamics. They were reacting to their new circumstances, managing from one situation to the next.
The pricing team was becoming increasingly concerned that their basic cost-plus approach to pricing policy on their consumable portfolios were gradually eroding margins. Similarly, their discretionary pricing practices for public hospital accounts were destroying relationships and trust with customers. Pricing policy transparency was becoming increasingly important to customers and buyers. And, the business’ lack of high-end agreement on pricing strategy plus weak pricing governance meant net profit and margins were at risk.
In this real life case study, there are a variety of factors preventing the MedTech business from becoming a functional pricing organisation. Taylor Wells found that the most serious problems were:
- There were a large number of people and departments in the business contributing to setting, executing, and signing off prices and discounts. Interestingly, none of them had clearly defined roles.
- There were interdepartmental silos and no single function was taking full accountability for pricing policy decisions.
- The CEO hoped that the sales and marketing functions would work closer together. But this was little more than a directive for everyone to get along through a difficult patch.
- The pricing team was struggling to get internal recognition. They needed more authority to be taken seriously. Apart from that, they were insecure about their role and mission. Eventually, they became afraid to voice their key concerns and risks to the business and C-suite. In the eyes of the business, they were more like a management reporting team.
- Communication between stakeholders was doing poorly. People were not on top of important changes that take place in business strategies. Then there was the organisational communication strategy being inefficient and piecemeal.
- There was no agreement on key business metrics. The business wanted market share and profitability, which is often a contradiction in terms. They did not know how to calculate profitability or when they were making money on specific products and customers.
- There was no clear line of authority and pricing policy was de-centralised. Basically, no one was accountable for decisions or processes. Lastly, there were a number of competing priorities and the pricing function had become chaotic.
Key learnings in pricing policy
The leadership team in this case study soon realised that they needed to optimise their current pricing strategies and operations. They undertook a pricing diagnostic and found that they needed to address leadership alignment around pricing issues and visions for the future. After this, they began to make plans to improve price governance and decision making throughout the organisation. They started to build a pricing committee to improve decision making across the business.
This preparatory work eventually enabled all functions to input into pricing decisions in a more structured and effective way. However, it also showed gaps in their internal pricing capabilities.
Fortunately, there was clear agreement across the business to evaluate their internal capabilities. The business had made a lot of progress and some noteworthy EBIT gains over the prior months during the initial phases of the pricing project. The majority of stakeholders agreed that it made sense to commit to improving their pricing capabilities as well.
The first step was to assess what pricing skills it had in-house across all core pricing competencies. After this was completed, they drew up a talent management plan. They took into account all the competencies that the business was missing within the current team structure. Then, they hired new people into the business to fill specialist roles that could not be sourced from their current talent pool.
Industry trends in pricing policy
The pressure to create and implement more innovative pricing strategies is increasing for pricing teams in Med Tech companies. Medtechs are responding by segmenting and rationalising their portfolios. Value based pricing approaches and customer insight led innovation are gradually replacing traditional cost-plus strategies. However, new product bundles, construct pricing constraints, and a range of pricing options are all adding to complexity.
The industry is shifting from a market-share to a profit share focus. Understanding pricing basics correctly is quickly becoming the number one priority for Medtech companies. They want to adapt and innovate their pricing to protect revenues and grow more profitably. As a business, product innovation is no longer enough to achieve the results you want. You need to take action to modify and adapt internal pricing strategies, structures, and operations to support the business’ direction.
There is a race to build sustainable revenue streams and increase profitability. Nowadays, aligning pricing to business strategies can feel like an overwhelming task. However, delaying or avoiding this can jeopardise net revenue and margin. Therefore, building a more integrated approach to pricing and effective team and organisational structures will help you capture the full value of your offerings. More importantly, hiring the right people for specialist pricing roles will be key to driving profitability and a culture of accountability over the next several years.
>>>Read about: Pricing Software Tools
- Price governance is very much like a formula for profit generation.
- Controls alone do not guarantee a competitive advantage, particularly if they stifle the ability to innovate.
- Establishing price governance is not a one-time implementation nor is it achieved by a mandate. It requires commitment from the management.
While most organisations limit governance to gain control and eliminate risks, the highest-performing organisations use this to take positive risks and gain a competitive advantage. By rolling up all investments and projects into your business’ product pricing portfoli, a complete and comprehensive view of the entire portfolio emerges.
See our recent blog on benefits of pricing tactics in a B2B environment. Check out whether your key account manager is properly supported. Click here to access your free pdf guide on driving pricing strategy in your business.
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