July 11, 2016
The rise of the digital enterprise has come with a rash of new issues that must be addressed. Organizations are struggling to utilize the increasing quantity of data available, make sense out of it, and create value for their customers in order to establish long-term profit growth.
As such, CFOs take on the brunt of this challenge as the “gatekeepers of profit.”
Traditional cost optimization approaches like cost cutting and downsizing are not sufficient anymore. CFOs also have to extract more value from markets and better leverage strategic investment.
Since 2012, pricing power has gained traction as one of the most powerful tactics to realize profit amidst fluctuating market conditions. Even Wall Street has taken notice. From Jim Cramer to Warren Buffett, financial leaders — in the media and in practice — are advocating for closer attention to pricing power. And many companies, including 3M, Apple, and Johnson & Johnson, have demonstrated pricing power mastery.
So, how exactly do enterprises become pricing power masters? In other words, what are the best ways to increase overall pricing levels while maintaining business levels — all without losing demand?
The combination of strategies must be customized for each business, but for pricing power to materialize and result in sustainable profit growth an enterprise must defend price premiums against the competition, set the price standard first in the marketplace, and capture a large share of the value delivered to customers.
By utilizing these tactics, an organization sets itself apart from the competition and drives sustainable profit to the bottom line, while succeeding during all market conditions and despite increased competitive pressure.
Now, this is all well and good, but there are key steps that need to be taken to make pricing power success a reality.
Every CFO and organization — no matter the size or industry — must establish pricing as a strategic priority. Without intentionally managing pricing power as a top-line objective, a company’s pricing is subject to more reactive mindsets, such as gut feel over data insights for pricing decisions.
In the process of getting pricing a seat at the executive table, the CFO should take the lead in establishing the foundation upon which pricing power initiatives can succeed.
First, a pricing champion must be designated. This person will assist the CFO (or even be the CFO) and determine the current and future states of pricing for the organization. Identify your strengths and weaknesses right now and where there are gaps affecting profitability. Benchmarks for the future can then be created to let a roadmap take shape.
With the right team in place to act as support, CFOs can begin disseminating actionable insights throughout the rest of the executive team and, subsequently, the company.
Collaboration and Transparency
A common myth is that pricing is solely a finance project. This is patently false. Pricing directly impacts the organization’s bottom line, so why should the majority of the company be on the outside?
The CFO is perfectly positioned to involve the rest of the enterprise and drive pricing power. The leadership team is made aware of pricing’s importance by bringing it to the executive table. Then the process of cross-departmental collaboration begins.
With pricing as a strategic priority, sales, finance, marketing, IT, and every other department can provide feedback to improve overall pricing strategies. In particular, the work between finance and sales is crucial, as your organization’s sales representatives are the front lines of profit.
They know more about your customers than anyone else and can provide invaluable input as to what works best when speaking with customers. Their input brings an element of real-world business experience that cannot be found in the data. They also represent the best channel to be transparent with customers to gain their trust and justify price changes based on differentiation and advantage.
These relationships are reciprocal, as well. Finance can improve sales’ success rate by providing data-based insights at every step of each deal, giving reps more confidence in negotiations and increasing profitability.
The right technology is the final piece of the puzzle in creating a solid foundation for pricing power success. Without technology that can handle the quantity of data coming into your organization, there is no way to discover quality insights that can positively drive pricing actions and impact profit.
From raw material to the close of a deal, there are dozens of chances for a price to stray from its peak profitability. A robust pricing system looks at every step of the transaction lifecycle to ensure your business is not losing out on potential margin.
The key is looking at a granular level to better understand the true value of your products and services. Segmenting your products and/or customers by region, industry, behavior, etc. provides CFOs with a holistic view of the organization’s profit drivers. A deeper level of analysis gives a more enhanced look at your innovation and differentiation positions, the key drivers of pricing power.
Do your products have innovative customizations that change your customers’ experience? A closer look helps uncover customers’ hidden needs and their willingness to pay. By defining this value, you differentiate yourself from the competition, making premiums easier to justify.
Despite traditional methods, price is not based solely on cost; it’s also based on value. An enhanced pricing system makes your products’ value transparent — internally and externally — by incorporating internal historical data and market conditions. A complete view that looks internally and externally gives any CFO a source of data-based insights to justify pricing as a top priority.
The foundation is set. Pricing is a top organizational priority. Your colleagues are aware of this and on board. Your team has the tools to analyze the data that can be transformed into actionable strategies for profit growth.
As with any strategy, the next step is measuring and refining. Remember that pricing power does not come on its own; you have to identify and capture it. Take your foundational structure of prioritization, communication, and technology and continue following the data toward pricing insights. The more your organization tracks pricing power, the greater the impact it has driving sustainable profit to your bottom line.
About the Authors
John Oosterhouse is CFO of Vendavo, a provider of solutions for price and margin optimization. Stephan Liozu is an assistant professor of strategy at Chatham University and the founder of Value Innoruption Advisors, a boutique consulting firm specializing in pricing, value, and change management.