Profitable Business: What Consultants & Managers Get Wrong About Pricing?
CEOs take on many risks when integrating a new pricing function within the business. It seems like failure is by far the most daunting part of building a more profitable business.
But did you know you can avoid years of pain, angst, and conflict by not accepting what the consultants say?
Yes, they are big brand consultancies. Yes, we’ve all heard of them advising CEOs leading international corporations through a significant transformation. But, no, their advice isn’t always right; look at their track record:
In this article, I’m going to share with you the typical consultant spiel on building an internal price management function. As a result you can say thanks but no thanks to years of problems, strife, and underwhelming profit results when you start to hear the pitch.
Why you need to disregard what most consultants and managers say about building a pricing function
For almost two decades consultants and managers have endorsed a prescriptive organisation design option for creating a more profitable business. They say:
“Build a centralised, command and control pricing capability and you’ll be able to build a more profitable business.”
Not so. Rather, many Australian businesses are currently going through major transformations. Top-down leadership no longer works well to profitable build business. (I don’t think they ever worked for price improvement projects – we probably just did it this way because this is the only way we knew.)
A command and control approach to pricing sounds good in theory. But after decades of trying, much Australian business is still struggling to achieve their full potential to drive profitability in practice.
To understand why this is happening, I’ve listed below the consultant rubric on integrating a pricing team within the business so that you know what not to do:
Step 1: Consultants recommend you build a centralised pricing function – tight pricing controls and overly complicated price governance. Vague implementation plans.
Price like you’re in receivership and hope for the best approach…
Step 2: Business managers write a few vaguely defined job ads and post on LinkedIn, job boards and maybe go to a recruitment agency to find talent. As a result, job specs are overly technical and experienced based. There’s a distinct lack of insight into the behaviours, style, and capabilities of high-performance pricing teams. Good talent is instantly put off by the poorly written job ads are arrogant style.
Step 3: The business requests HR to undertake an external search for pricing talent without adequately considering internal staff. Consequently, HR offer little contribution to job role development, as the function is relatively new and unknown entity. HR relies on CVs and interviews to hire new people for the new pricing function. New hire churn rate is high due to bad hires, bad bosses, and problems with the new team structure.
Step 4: The business is instructed to shift pricing responsibilities from individuals currently doing it to the new pricing team to avoid margin leakage. Therefore this creates silos and divisions between departments instantly. The new pricing team struggles to balance the conflicts and trade-offs. It takes 2-3 years of hard work to gain the trust and respect of peers.
Step 5: The new pricing team is left fighting massive amounts of resistance, conflicts, and trade-offs without support or sponsorship from the executive team. Hence stakeholders and teams resent handing over their pricing authority to the new pricing team.
In conclusion, every step from here is a hard, slog and battle. The pricing team is left fire-fighting random issues on a daily basis and lose focus on driving profitability. The business resigns itself to a pricing support function and never really succeeds in its mission to leverage pricing to build a profitable business.
A command and control does not build a profitable business
By implementing a predictable, formulaic command and control approach to integrating a pricing team within your business, you’re creating lots of obstacles, conflicts, and problems for yourself and your teams.
Without the right culture and capability in place, it’s incredibly difficult for your teams to work cohesively with the pricing team to get the dollar value from any investment in pricing strategy, technology, and optimisation.
Too many consultant and managers still operate in a command-and-control system. A bit like the military, i.e., officers barking orders at their subordinates while keeping their true intentions close to their chest to confuse and bewilder their troops. Both approaches are assertions of control – one aggressive, the other passive-aggressive.
When new pricing hires and their peers in other department aren’t sure what you want to accomplish by changing pricing, they automatically become resistant to change. They don’t feel safe, and workflows and implementation become easily disrupted and unfruitful.
Instead of acting with confidence and autonomously, teams begin to hesitate to make decisions; get distracted by low-level price operations and maintenance, or struggle to admit their mistakes.
Hiring can accelerate your journey to a more profitable organisation
Integrating your pricing team into the business does not have to be fraught with risk. There are better ways of doing it.
To discourage the command-and-control pricing set up a disaster (described above), I highly recommend that you put a lot of energy into hiring.
Reasonable pricing and commercial leaders and teams can be the difference between building a profitable business or struggling to protect your business from margin pressure.
Look for open-minded people who can take feedback. They are leaders and managers with reasonable levels of self-awareness. They know their capacity for advanced pricing setting roles. These people also tend to like working in teams and encourage autonomy and collaboration even at the cost of control.
I also try to screen out the wrong ones early, i.e., people who are self-centered people and incompetent practitioners. This does not mean screening out people with the alpha dimension to their personality. It involves screening out people who think their alpha, but who are in fact beta, gamma or even delta – but too oblivious to realise.
After ten years of consulting, research and executive evaluation it seems like these are the familiar themes and trends emerging:
- The centralised pricing model may not be as effective and efficient in practice as in theory.
- The transformation path to a command and control pricing model is a harrowing and challenging journey for well-established large corporations. Especially ones used to operating in a different way for a long time.
- The main trade-offs you’ll have to contend with a traditional command and control model are speed & effectiveness.
In short, the command and control model of pricing, and the typical road to get there can often work against you and your mission to drive profitability.
Therefore, to learn better strategies to integrate a pricing function within your business check out the guide here.