Pricing departments are becoming more common in large companies. Is it any wonder given how powerful pricing is? We’ve all seen the math showing how for a company with 10% gross margin, a 1% improvement in pricing leads to a 10% improvement in profits. That’s huge. Every company should be determining how they find multiple 1%’s.
Is a pricing department a good way to find those 1%’s?
To really answer that we need to discuss what a pricing department can do well and what it can’t do well.
First, people in a pricing department are NOT experts on your products or on your competition. They have no idea how much your customers are willing to pay. Hence, when it comes to actually setting prices they are probably not the right people for the job.
Also, pricing people don’t have P&L responsibility, so they should not be the ones making decisions about accepting large strategic deals at deep discounts. That belongs with someone in the product line.
Pricing departments are rarely involved in price execution.
However, pricing departments should be fantastic at understanding and communicating how to make great pricing decisions. They should be able to monitor and/or audit pricing practices and find areas for improvement, ideally the lowest hanging fruit. They should be able to identify the huge strategic opportunities and get executive level buy-in to pursue them. These people must be true leaders, getting other departments to participate in their own change without having any real authority.
Should your company have a pricing department? It probably depends on how big your company is. Startups don’t need a separate department, but they should have some pricing expertise. Maybe they could hire a pricing consultant once in a while to help them find their low hanging fruit. (I don’t consult any more but feel free to ask me for a referral.)
Large companies probably should have pricing departments. The most effective ones I’ve seen act as internal consultants. For example, Google’s pricing department consists of some very talented pricing people, led by an ex-consultant. They are “hired” by different departments for pricing projects. Like any consultant, once the analysis and implementation are completed, they go on to the next project and leave the ongoing execution to the organization that hired them. Many large companies use a similar approach to their pricing departments.
Mid-sized companies should consider hiring a single pricing leader. Someone with fantastic leadership skills who can build rapport with all of the departments in the company who have an interest in pricing. Ideally, this pricing leader has good relationship with and the backing of the CEO, not that he or she relies on that authority to make change happen.
Whether or not you should have a pricing department depends on your size and complexity. Regardless, you should regularly audit your pricing practices, monitor your pricing results, and capture more 1%’s by fixing bad pricing. This is best done with the help of someone with pricing expertise, whether an employee or consultant.
What about your company? Are you ignoring pricing or do you treat it as a critical strategic decision? Are you finding and capturing more 1%’s?