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 – not so good:
- 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
Why? It all comes down to price governance..
Price governance is the catalyst, which brings a fair pricing policy and strategy to life: It refers to the rules of a 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 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 to:
- prevent poor pricing decision making
- reduce pricing chaos
- build consensus for your pricing policy
- eliminate operations that lead to margin loss
- drive c.20 per cent higher return on assets
So, in this article, we 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 achieve 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..
Establishing a fair pricing policy
Establishing a fair pricing policy comes down to price governance. It’s the responsibility of management, the pricing leader, and stakeholders to think through the right price policy guidelines to ensure everyone in the business is clear about what a fair pricing policy looks like. And what part each stakeholder involved in pricing decisions play in maintaining the rules of pricing to best effect.
Leading organisations that do governance well; tend to have fewer price governance mechanisms controlling their price policy. In fact, they have lighter processes than most businesses do because they have learned to work together well and have 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 commonly have a culture of compliance rather than commitment driving their official pricing policy. They also experience a series of breakdowns in decision making authority (usually discounting and sign-offs procedures) as there are limited awareness and understanding of why people should support the new pricing policy.
Factors to considers when establishing better price governance in fair pricing policy:
- It is like a team sport. An athletic team cannot play unless players master their positions, it will falter when individuals do not fit their roles. Hence, its success depends on the governance roles key stakeholders take. This means you need the right individuals from their position in the organisation and specific skillsets to create a fair pricing policy.
- You need the right skillset 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 perform adequately and others do much 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 – because outcomes always come first.
- Communication is key. Integrated communication is important to selecting the right inputs for price governance. In addition, to facilitate and communicate pricing policy decisions more effectively; you’ll need governance communications emphasising 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 leader need to make an inventory of their communication tools when they notice a lack of compliance to pricing policy. This will involve revisiting governance decisions that are breaking down or re-writing sign off procedures that are wasting time or delaying decision making.
A fair price policy without a plan is simply a wish
Price governance enables the whole business to be positively involved in strategic price management, including all the benefits and outcomes the business receives from the programme. However, you may find your commercial teams fighting against change, believing that price governance is another obstacle in their way to making 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 to help managers to improve responsiveness to challenges and manage current and future revenue and margin 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 will ensure 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 when required.
- Execution and enforcement: Governance in pricing provides a framework to manage all forecasting, supply and demand. Through a single point of reference – a pricing policy document – where all initiatives are prioritised and fulfilled. It also allows standardising technology platforms and helps managers to use systems to 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.
The following considerations involve formulating the pricing policy:
(i) 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 it all.
(ii) 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 and operations and finance teams should know what metrics and goals mean and how they help to price to drive more profits.
(iii) 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 generates more volume and revenue for the business and/or more competition into 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 think of the risk of short term thinking; and keep an eye on the long term welfare of the company.
(iv) Add Flexibility Into Your Price Governance:
Pricing policies should be flexible enough to meet changes in economic conditions. If a firm is selling its product in a highly competitive market, it will have little scope for pricing discretion. Prices should also be flexible to take care of cyclical variations.
(v) 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, banks, insurance and financial services). Often the government prefers to control the prices of essential commodities to protect consumers.
(vi) Remind Yourself Daily Of The Business’ Overall Goals & Objectives:
Pricing is not an end in itself but a means to an end. The fundamental guides to pricing, therefore, are the business overall goals. On a more specific level, objectives relate to rate of growth, market share, maintenance of control and finally profit. Pricing policy should never be in conflict with other policies and practices.
(vii) Consider Price Sensitivity:
The various factors which may generate insensitivity to price changes are in consumer behaviour, variation in the effectiveness of marketing effort, nature of your products; and the importance of service after sales, etc. Businessmen often tend to exaggerate the importance of price sensitivity and ignore many identifiable factors which tend to minimise it.
(viii) Standardise Your Pricing Process:
A business may have to take many pricing decisions. If the data and cost are based on conjecture, it has to rely on some pricing formula. If the company is selling its product in a highly competitive market, it will have little scope for price discretion.
In effect, price and business intelligence and performance dashboards can significantly improve forecasting and price policy decision making. The organisation is much 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, fair pricing policy is just a document.
As you can imagine price governance is a complex system of many moving parts. It involves management, the pricing team and key stakeholders to agree on what a fair pricing policy actually is.
But very often agreeing (or disagreeing) is where pricing policy development and execution fails. Especially in businesses where there is no management alignment and limited consensus on what the proper strategy – let alone policy – should be.
Importance of price governance
The importance of price governance is that it achieves successful outcomes and behaviours to drive your pricing policy. The reason you have a pricing policy is that you want people to understand the important part 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, then, you’ll need your pricing manager to both lead and execute new governance processes and tasks. This will mean that should be executing governance programmes with both discipline and creativity. Governance is not always a straight line – 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.
- Price governance is 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 or achieved by a mandate; it requires commitment from the management.
While most organisations limit governance to gaining control and eliminating bad risks. The highest-performing organisations also use it to take good risks and gain competitive advantage. By rolling up all investments and projects into your business’ product pricing portfolio; a complete and comprehensive view of the entire portfolio emerges.
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