The Role of Boards in Pricing – Part 2

15203232495_2d422ccfb5_zLast week we justified why boards should pay attention to pricing. This week we give some additional question areas where their curiosity could drive companies into making more money.

Here are the three questions from last week:

– Can we clearly articulate the different market segments, key competitors in each segment and how buyers choose between us and the competition?

– Do we have a clear price segmentation strategy? This should be both between market segments and within a market segment.

– Are we building “Will I?” type products?

Today’s question are more organizational in nature.

– Are pricing roles and responsibilities clearly understood?

Pricing, one of the most powerful levers in the company, needs to be well managed. In many companies this is haphazard, not well thought out. A board member should be able to see the pricing organization. Is there a pricing council coordinating the different roles and making the big decisions? Is pricing authority clearly laid out? In each of these roles, is there an effort to make them more effective?

Of course the board isn’t making any of these decisions. Rather they want to know that the pricing organization is well thought out.

– Are we auditing the quote to realized revenue chain?

There is so much money to be made in this audit. Somehow, money falls through the cracks as paperwork flows through the process. All of the following should match: quote to the customer, purchase order from the customer, invoice to the customer, payment from the customer. It is surprising how often they don’t. This is free money. Are we auditing it?

– Is sales compensation aligned with profit maximization?

OK, no way does the board want to get involved in setting sales compensation. However, a lot of money is left on the table when salespeople are compensated on revenue alone. In general, salespeople would much rather close a deal quickly at a lower price than hold out for a higher price. That does make our salespeople more efficient, but it destroys our margins.

There are techniques to incentivize sales to close deals at higher prices. The question for a board is are we using one of the techniques? If not, is there a good justification?

– Do we track the profitability of individual customers?

When companies have the systems in place to track their costs to serve individual customers, they often find that some customers aren’t profitable. Even when they don’t, they find large variances in costs of serving different customers. There is nice profit in getting these costs under control.

As true with all of these questions, the board isn’t going to dig into individual customer’s profitability. Instead, the board should see a couple examples and know the company is monitoring this themselves.

– What data are we collecting? What data should we be collecting?

This one goes beyond pricing into almost every area of the company. The Chief Information Officer should be heavily involved with this one. However, is the CIO focused on the data that can drive better pricing decisions?  Does he or she even know what data should be collected to optimize pricing?

Boards have high level oversight into companies.  They don’t need to or want to know the details of their company, but they do want to monitor the capabilities that have a huge impact on the company performance.  Pricing is one of those issues.  Not only does pricing itself have a huge impact, but simply understanding pricing demonstrates an in depth knowledge of the business.

What do you think?  Should boards have knowledge of pricing?  What should they know?  Please share your thoughts.

 

Photo by Stephen G Barr