Pricing Department: How Do Chief Executives Make Big Pricing Decisions?
Across many markets in Australia, from Telecoms, Banking, Energy and Manufacturing, top CEOs such as Andrew Penn, Alan Joyce, Julian Segal, Brian Hartzer, and Rob Sindel are all taking assertive action to create a new pricing department focused on customer value and profitability.
Conventional cost-based pricing practices, structures, and beliefs are buckling under the rate and pace of change driven by technological innovation and competition. Change is on its way for all pricing team job descriptions and the established pricing department.
Difficult re-structures, change, and rationalisation are now imminent.
The growing value-based movement has reached the top of the Australian corporations. CEOs and executives are now in the process of making really difficult people and pricing decisions to maintain a lead in their respective markets.
In this article, we’ll take a closer look at the value based movement taking hold of large ASX listed businesses in 2019 – using Telstra as a real-world example of how top chief executives make big pricing decisions.
Why are ASX Listed Businesses like Telstra moving from a cost-plus to value-based pricing culture?
On Wednesday 20 June 2018 – Telstra announced their new strategy to lead the Australian market by: “Simplifying its operations and product set, improving customer experience and reducing its cost base.”
Which is another way of saying that Telstra is in the process of creating a new telcos business.
Big things are about to happen at Telstra’s pricing department: Andrew Penn, CEO of Telstra is about to restructure the business to differentiate the Telstra service, customer offer, and pricing plans. Business critical pricing and people decisions that’ll help Telstra stay relevant in a digital era.
This is great news for both customers and Telstra shareholders. Telstra is attempting to push beyond the boundaries of what was formerly defined as telco provisions. They are about to become fully value based and digitised to maintain their lead in the market just like T-Mobile did six years ago.
About six years ago, T- mobile, was like Telstra today: signalling a big transformation was on the cards.
No one was quite sure if T-Mobile would make the transition or not. Then, at a press conference, John Legere, CEO of T-Mobile, made a memorable and quite shocking declaration to: “Put an end to a stupid, arrogant and broken (telecom) industry.”
Since then, T-Mobile has boomed. Not only has T-Mobile moved the business from cost-based to value-based, but they’ve also completely transformed the global Telcos market for good. What’s more, T-Mobile’s customer base has grown from 33 million customers back in 2013 to 80+ million today.
Customers like telco businesses that are value based
A large factor of T-Mobile’s successful transformation comes down to creating an alternative telcos business positioned against established telco companies. Rather than take a conservative position in the market, T-Mobile decided to lead an irreverent “un-carrier revolution.”
At the head of this campaign, was their CEO John Legere – who has done a great job at articulating the disgruntled voice of the customer to breakdown old institutional habits and conventions inside the business and within the global telco’s market.
John Legere is doing what only a few exceptional CEOs have done before:
- Articulating real customer pain points and grievances with an old and broken telco model.
- Completely scrapping complicated customer offers.
- Drastically simplifying overly complicated cost-based pricing plans.
- Providing customers better online and off-line customer services.
I suspect Telstra’s CEO, Andrew Penn may do something similar in Australia. However, the voice of the Australian public will be different from the American public.
Like T-mobile, the Telstra business transformation is likely to bring about huge changes to their current pricing department and system. Changes that T-Mobile has already made to their pricing or are in the process of doing like:
- A simple pricing plan for all types of phones
- No-lock in contracts
- No hidden charges
- Demolished international roaming fees
- No data charges
- Automatic upgrade of phones
- An interactive and intuitive platform for enterprise clients and consumers to manage their work and leisure activities
- A centralised pricing capability
What does this mean for Telstra’s pricing department?
A lot of change.
Currently, Telstra has a large pricing department working in different business segments (i.e., consumer, enterprise, small business). There’s a lot of smart pricing people in the business, but they’re fundamentally working in silos.
Silos are bad for pricing teams because they separate and confine price management and culture within rigid organisational structures, and fairly conventional pricing and management practices. I suspect a lot of pricing work at Telstra will be centralised and simplified in the future.
You’ve got to remember that the Australia telco market has been pretty much the same for many years now. When things don’t change a lot in businesses, resistance to change can be quite high. Corporate inertia can also be a problem – as can intellectual uniformity (the opposite of intellectual diversity).
Again, I suspect the pricing department has pretty much operated a fairly fixed pricing system to date. Annual price reviews underpinned by lots of tactical discounting to keep up with intense competition for market share.
To achieve their future goals, Telstra’s pricing department will need to be agile. They’ll almost certainly need a new pricing department structure which enables the team to find sustainable revenue streams with new domains, like platforms, NBN connections, and big data.
The Telstra business transformation will require a complete mindset and behavioural change. By no means an easy task – but business critical.
How to build an effective pricing department structure
Although transformation sounds exciting and new, change can be painful and full of unknown problems and hurdles. Lots of high expectations to deliver results. Often limited outcomes produced.
Everyone who’s experienced changing a pricing system from cost-based to value-based too readily will bring to mind images of a large ship slowly sinking. Most end in disaster. I say this because creating a new pricing department and system is not easy.3/4 of transformations fail – they fail to achieve the anticipated results the consultants promised, or they are abandoned completely.
It seems likely that for a reasonable proportion of these failures, many occurred because the business was not nimble enough with the change processes. Or perhaps organisational design was creating silos and bottlenecks.
From my experience of over 30 pricing transformations to date, many pricing department re-structures get messy because the capabilities and relationships between team members (particular the capabilities of the head of pricing) were not understood or managed properly.
In other words, the pricing department was not set up correctly. From pricing department structure design to hiring the wrong people for pricing manager job descriptions and head of pricing positions.
Listed below are things all CEOs should know as they make changes to their pricing system and pricing department:
#1: AVOID PLACING THE WRONG PEOPLE IN THE RIGHT FUNCTION
A large number of managers are putting staff forward for pricing roles which often turn out to be completely unsuitable for the role or team. Overconfidence is a problem for managers.
Our research shows most managers are unable to objectively judge their pricing skills and capability – let alone predict or judge another person’s suitability and fit for new pricing roles (particularly in roles created to drive a pricing transformation in the business).
Misfitting styles to functions based on false perception is a recipe for disaster. Hiring or promoting people based on personal preferences, tenure, or perceived time and resource constraints rarely turn out well.
#2: AVOID UNPROVEN FRAMEWORKS & COMPETENCY MODELS
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 evolving characteristics, behaviours, and capabilities of new price team job descriptions and roles – even for head of pricing job descriptions and pricing director roles.
Although Lominger is a well-known brand for HR functions, the framework struggles to define the pricing competencies, skills, and behaviours required to be successful in a new price leadership role:
- The behavioural descriptions produced are generic and vague – often aligned to accountancy rather than advanced price and revenue management.
- The framework is HR focused not business or customer focused
- The consultants that complete them often lack industry and subject matter specialisation
#3: AVOID GENERIC TESTS TO DETERMINE FIT
Most hiring managers are using the wrong data to determine candidate fit and suitability for pricing department job descriptions without even realising it.
Our research shows that generic aptitude testing, like SHL aptitude testing and standard psychometrics, struggles to measure and identify the right people for world-class pricing teams.
Generic tests were never designed to measure pricing skills, behavioural or competencies in the first place – let alone someone’s potential for an evolving discipline.
CVs and Standard assessment tools often delay recruiting processes and overlook high-quality candidates more suited to pricing roles.
Relying on IQ, EQ, and even competency-based appraisals and appointments will increasingly exclude you from the best candidates in the market and deliver you more unsuitable ones.
Even “home grown” tests (i.e., the tests produced by the hiring pricing manager or even consultancy firms) are also ineffective. They are often job-specific tests and limited to the hiring manager’s personal experiences, knowledge base of pricing (sometimes good, sometimes not so good).
Pricing managers, consultants and most pricing recruiters are not business psychologists – they are not certified or trained in occupational testing and may overlook or misread key signs during the hiring process creating more bad hires.
This includes hiring:
- Toxic individuals with poor leadership and people management capability
- ‘Yes’ men and women
- People that don’t challenge you with a different viewpoint
- People that you are familiar with
- People that refuse to learn and give you the same old cost plus solution
- People that can’t except feedback or don’t listen
#4: AVOID PLACING THE RIGHT PEOPLE IN THE WRONG FUNCTION
Legacy and even new pricing department structures are not always right the first time around. When you put a good team into a bad pricing department structure, there’ll be lots of confusion among teams and roles. Price decision making will eventually bottle neck within sub-cultures or latent power structures, and implementation will become slow and unfruitful.
Not getting organisation design right the time is not a catastrophe. What is a disaster is keeping a bad pricing department structure. Our research shows that when a business experiences a series of implementation mistakes or new hires repeatedly fail in their role, its a sign of structural imbalance rather than bad hires.
A set and forget attitude to organisational design has a devastating impact on staff morale, pricing performance, and culture.
A new era of pricing
Having spent 18 years evaluating and tracking pricing, commercial and financial executives and studying the factors in their performance, I am convinced that organisations and their leaders must transition to what I think of as a new era of organisational design, hiring and talent management as they re-structure their pricing departments.
A new era in which:
- Organisation design is not just a one-off, cost-cutting event but rather an on-going learning process. A means to adjust and tweak organisational resources to achieve real outcomes, growth, and efficiency at multiple levels.
- Talent evaluation is not just a measure of what people did in the past or how well they performed on the day of an interview, but rather a measure of what they can do now and in the future.
- Hiring is not just a routine transaction with limited value for anyone (manager or candidate), but rather an engaging process to accelerate change, learning, and adaption to new ways of thinking about value and pricing.
And, yes, I do realise that this vision for building a new pricing department is much harder to do than the traditional way of building teams (i.e., CVs, interviews, standard testing, black box performance appraisals). However, it’s not impossible.
For the past two decades, my sole focus and dedication have been on improving the organisational design, executive search and evaluation process for leading businesses making significant changes to their pricing system, operations, and pricing department.
To date, we have studied a range of pricing performance factors from 387 different Australian and global organisations to define competencies, characteristics, behaviours.
Our research shows our pricing evaluation system has a higher predictive accuracy than IQ tests, interviews, CVs and behavioural assessments. This is according to data on hundreds of executives we assessed so far.
Our multi-trait assessment model for the head of pricing jobs and pricing directors was first conceived and tested two decades ago during post-graduate studies at the University of Cambridge – with ongoing testing and refining across multiple business settings, industries, and executive samples globally.
We have worked with some of the biggest brands in Australia, with a combined market capitalisation of billions of dollars, revenue of over $40 billion, and more than 1 million employees.
We set up the business because the traditional recruitment model and recruiters are destroying the potential value a pricing department can provide a business.
In this article, we discussed the value-based movement trending in large FT500, and ASX listed businesses. We looked at the significant transformation occurring in the global telcos market right now. Including the substantial impact on Australian telco pricing department structures.
Our research shows that traditional indicators of success like past performance, intelligence, emotional intelligence, and even experience are now unreliable measures of success for all new pricing roles. We believe CEOs that want to make a culture shift in their business can only do so by using better hiring, talent management, and organisation design practices.
We also discussed how to avoid four common mistakes during a pricing department re-structure, which were:
#1: Avoid placing the wrong people in the right function
#2: Avoid unproven frameworks & competency models
#3: Avoid generic tests to determine fit
#4: Avoid placing the right people in the wrong function
We outlined a new era of pricing and provided a vision of next generation talent management.
A major implication of our research for Australian CEOs is that pricing department structures and teams are evolving quickly: In light of considerable technological evaluation and industry convergence, CEOs need more agile organisations and highly specialised pricing teams to maintain a lead in their respective industries.
Want to learn more about how to improve pricing capability using better organisation design, hiring, and talent management practices? Download our complimentary e-book on pricing and price leadership resources now to find out.