Financial Performance: Chief Execs Face Critical Price Performance Challenge
The people you get to set and manage your prices can be the difference between improving your financial performance and increasing profitability or struggling to reach your financial budgets each month.
The crazy thing is though; many CEOs view their team’s pricing skills and capability as secondary to strategy or systems implementations.
In this article, I’m going to share some insights from major ASX price improvement projects. This will help you improve your financial performance without dealing with painful people issues along the way.
Improving financial performance is difficult when people don’t know how to set and manage pricing
Over the past ten years, many major ASX businesses have tried to improve financial performance without a dedicated pricing team. As a result, most have become stalled or blown off course. Consequently, they have not succeeded in their mission to embed better pricing practices within the business.
Consequently, things didn’t work out. CEOs bought expensive price software solutions and found themselves plagued with very complicated people and financial performance issues.
Some people didn’t know how to use the pricing system. Some people wouldn’t use the new price software system and thought they knew better. These people used their pricing models because the system was producing whacky prices – i.e., low or high ball prices wholly misaligned to the customer base.
Nearly all CEOs that have embarked on a price improvement program have said they massively underappreciated the role of their teams, culture, and capability to drive their new pricing system.
Furthermore, our research shows that it takes businesses 3-5 years to transition from an old to a new price operating model. Below listed are seven people issues that have been consistently stalling Australian CEOs, as they pursue superior financial performance. We hope knowing what they are can help you avoid wasting lots of time, energy and disruption as you transition your business.
1. Lack of cognitive diversity
There is a lack of cognitive diversity impacting lateral thinking/problem-solving skills in many teams and organisations across Australia. In simple terms, there are too many people with the same perspective on pricing, knowledge base, skills, and information processing style.
When leaders and teams deploy a formulaic problem-solving style, learning and financial performance in the face of new situations slows down considerably. Price execution suffers because teams take too long to make decisions and solve problems.
2. Lack of understanding about the discipline
As a result of business-wide transformations, it’s not uncommon to find executives from other functional divisions inheriting price leadership or management responsibilities. A large number of executives have excellent knowledge and technical skills in other areas, but limited experience in pricing. Hence, it can be difficult for executives to develop the right approach to drive financial performance due to not understanding the extent of the pricing skills gaps across their teams.
3. Outdated talent management practices
Hiring or promoting people based on personal preferences, tenure, or perceived time and resource constraints rarely turn out well. Many leaders have been putting staff forward for pricing roles while they are utterly unsuitable for the position or team.
4. Limited talent identification process
The selection process for pricing leadership roles is often set up to fail before it even begins. Our research shows that over 70% of HR managers rely on a generic Lominger (Korn Ferry) framework to understand the characteristics of price leadership. Also, refusing to use a proven framework will create role ambiguity. Hence confusion amongst teams, about how they should access and feed into the pricing function, arises.
5. Human bias
A surprisingly large number of managers are unable to judge how they can understand, manage and set prices. Almost all managers who need to improve their skills and pricing practices often don’t take the initiative. It seems like they have false belief that they’re doing just fine. It takes 2-3 years to break an entrenched commodity mindset and un-learn bad habits.
6. Organisation design/team integration issues
The wrong team structure will defeat high performing pricing teams every time. Legacy team structures are often misaligned to strategy or execution, creating confusion amongst teams and roles. Also, price decision making bottlenecks within power structures and slows implementation all around.
7. Changing market dynamics
Managing prices to balance profit objectives against staying competitive is increasingly complicated. More customers, more products and higher revenues under management yet lower gross margins and declining EBIT margins.
The movement from cost-plus pricing skills to more advanced pricing strategies and analytics has been a positive move for many businesses. It drives more revenue and margin, but consequently, it’s creating new skills gaps across many Australian organisations. Over 80% of applicants lack the insight into advanced pricing practices.
Finding and identifying talented people with the capability, lateral thinking, and pricing skills to improve financial performance is not easy:
- 80% of staff assigned to pricing roles fail to perform more complex pricing duties, especially relevant at very senior levels.
- 90% of businesses still believe they can ‘make do’ with what they’ve got while improving financial performance without a dedicated pricing team (i.e., get existing people from sales, financial or marketing to run pricing).
- Many HR functions continue to post specialist pricing roles on LinkedIn and select all the wrong types of people for their pricing function.
No other financial, sales or marketing function can set and manage prices to improve financial performance like a dedicated pricing team that knows what they are doing.
In conclusion, the real value of a pricing team is the objectivity, focus, and expertise they apply to solve commercial problems within shorter time frames.
Not everyone is good at pricing or has the potential to be good at pricing. Most of all, assuming people will be good at pricing simply because they have an accountancy or financial background is seriously flawed.
If you would like to learn how to improve your pricing capability – read this guide.
This guide provides insights into key performance issues, plus tips on how to assign the right people to new price duties and roles.
Don’t lose another dollar with the wrong team – check out the guide here.