What do executives get wrong about pricing?  They treat it as a noun not as a verb.  Treating price as a verb drives executives to define the culture, organizational structure, and process for making pricing decisions.  Leading firms do this.  Failing firms don’t, as the author explains. Tim J. Smith, PhD is the founder and CEO of Wiglaf Pricing, adjunct professor at DePaul University, and Academic Advisor for the Certified Pricing Professional designation. His most recent book is Pricing Done Right:  The Pricing Framework Proven Successful by the World’s Most Profitable Companies (Bloomberg Financial, 2016). He can be reached at tsmith@wiglafpricing.com.

The Pricing Advisor, January 2017

After publishing Pricing Done Right, the most common question I have been asked is “What do executives get wrong about pricing?”  That is simple.  They treat price as a noun, not a verb.

The Failure of Price as Noun Alone

When executives treat price as a noun, it becomes just a number associated with an offering.  Price is reduced to just the amount an offering will cost a customer. The quicker executives identify that number, the faster they can concentrate on other, “more important” issues…in their mind.

But price is a highly important issue.  Some even say it is the most important issue facing a company.  Price is the answer the strategic business questions: What business should we be in?  Can we beat our competition in that business?  Will customers be attracted to our value proposition?  Who will derive value from our offering?  What value will customers get from our offering?  Can we extract our share of the value delivered?  Is it worth creating and delivering that offering?  How can that value exchange be improved overtime?

If those questions don’t go to the core of business strategy, I am not sure what does.  And investors know it.

Facts have been repeatedly demonstrated. A small change in price has a larger impact on profits than any other similarly small change in costs or market share.  A price changes impact stock values quicker than most any other strategic decision.  People lose jobs and investors lose money when price is mishandled, and the opposite is possible only when price is handled correctly.

Every week, I find one or two stories of pricing decisions in the news.  Some are good.  Others are bad.  The good ones tend to result from treating pricing decision making as a verb: the result of a well-considered research process and a decision that has been properly vetted by key departments across the organization.  The bad ones tend to result from treating pricing as a noun: the result of a need to reach some goal quickly and get a number that “feels right” on an offering.

The Success of Price as a Verb

The correction to these failures is to properly treat price as a verb.  The verb of pricing refers to the decision and decision process used to determine price.

Once price becomes a verb, one realizes it is an action.  Like every other act of a company, it must be managed.

Decision Framework

The Value-Based Pricing Framework is a framework for managing pricing decisions within a competitive business.  It tracks the management of price across an organization, across product lifecycles, and across customer relationships.  It starts with the larger business strategy decisions, drives it through the pricing strategy decisions necessary to support the business strategy, then moves into market pricing, price variance policy, and finally price execution at the individual customer transaction level.

Decision Process

Like any other decision process, pricing needs process as well.  Processes for defining the market price.  Processes for managing discounts and promotions, also known as price variances.  And processes for capturing the correct price from every customer transaction.  Gut reactions and pop-decisions won’t suffice.

Organizational Structure

Once a process is defined, it becomes clear that people and tools are needed to run those processes.  Hence, at any organization of moderate size or larger, executives begin to build pricing teams and support that effort with proper software and external professional services as needed.

Furthermore, as a decision that impacts the entire organization, price is a decision that benefits from cross-organizational input.  Research has demonstrated that firms that make pricing decisions with the input from sales, marketing, and finance along with others outperform, that is make more profits and grow faster, than firms that leave pricing decisions to one department alone.  This has led organizations to create pricing councils, run by the pricing department but including members from across the organization, to drive pricing initiatives.

Dynamic Decisions

Like any other management decision, prices change because facts change.  One can’t expect plant investment and employment relations decisions to be made once and held constant forever.  Plants and facilities become outdated and need replacement or repair.  Employees grow and get promoted or otherwise transition over time.  People need constant nurturing to create dynamic teams that grow.  In the same manner, one shouldn’t expect pricing decisions to be static either.

All competitive pricing is dynamic.  I would even go as far as to state that people who think “dynamic pricing” is a new and unique category unto itself haven’t really thought about price very deeply.  For where is dynamic pricing’s opposite:  static pricing?

Think about it, how many items or offerings have had the same price for the past 20 years?  Gas, houses, clothing, screws, hammers, drills, electric meters, air fares, hotel rooms, and a sundry list of other items have all changed their prices over time.  For those few offerings that did have relatively constant prices, the price consistency tended to be more of a political decision than a decision that would benefit the organization. Where list prices are held constant for a year or so, one will still generally find dynamic pricing.  Transaction prices generally vary dynamically through discounts and promotions.  And yes, discount and promotion decisions are as dynamic as yield management systems at airlines, or algorithms at online retailers.

No.  Static pricing is the rare and unusual strategy. Dynamic pricing is the norm and has been since the creation of markets.

Price is a Verb

So what do executives get wrong about pricing?  They treat it as a noun not as a verb.  Treating price as a verb drives executives to define the culture, organizational structure, and process for making pricing decisions.  Leading firms do this.  Failing firms don’t.  Executives, you have a choice.