The Importance of Pricing for Different Company Departments
This article will discuss the importance of pricing for different departments within a company...
Finance Department
Finance and pricing are interesting because, first of all, the main role of finance in any company is to ensure the company has enough cash to support the operation. But this typically means focusing on understanding and controlling the cost of a company, making sure that the company always has the cash it needs, and in doing so, making its margins high enough so that it is profitable. And if the company isn't profitable, it finds ways to add cash to the company in one way or another so that operations can continue. What makes finance and pricing interesting is that finance also is acutely aware of the importance of Price because they closely monitor both the company's bottom and the top line. Consider that, for any company, the resulting profits come from only three variables:
Whatever the cost happens to be.
Whatever the sales level happens to be.
Whatever the price of what the company sells happens to be.
(Price * Sales) - Cost = Profit.
Only those three variables affect the profitability of a company. And, of course, the company has to be profitable. If the company is not profitable, eventually, it will run out of cash, whether it's cash from cash flow or cash from investors. Having said that, some companies can be unprofitable for a long time as investors continue to support the company with cash. (Think Amazon and Tesla.) But if the company runs out, the options are to sell the company or the company dies, which is probably not a result that any of us want.
While finance is acutely aware of the importance of Price, at least in my conversations with CFOs of a wide variety of different companies and different sizes, finance doesn't have the understanding that pricing is something a company can work with proactively. And taking a holistic view of a company's pricing, pricing can become a profit driver. So, in short, finance understands Price, but doesn't always understand that it's something that you can practically work with and that there are many different levers that a company can use to influence what their customers are willing to pay. For example, companies want to affect customers to pay higher prices without losing sales volume. So pricing can have a considerable influence and a significant impact on the financial operation of a company.
Marketing Department
The next group I want to talk about is marketing. Pricing is highly relevant for marketing. If nothing else, there is something called the four Ps of marketing. These four P's are:
Place, meaning the marketplace a company should focus on.
Product (that also includes services).
Promotions are how a company makes potential customers aware that your company exists.
Price is the pricing strategy of how pricing and discount levels may be stratified.
If you think about these 4 Ps of marketing, "marketing" really has two different tasks. The first is to understand "the marketplace" and what makes buyers buy. The second is to influence buyers, so they select the company's products or services more.
I speak to many marketers - CMOs, VPs of Marketing, and Marketing Managers. In my experience, there is a misunderstanding of the role of marketing. Marketing typically spends a lot of time on the Promotion, a little bit on Place, and even less on Product - and nothing on Price. This is significant because these 4Ps all interact.
Different marketplaces will have different product (or service) feature preferences, benefit expectations, and communication preferences, and all of these will lead to a different willingness to pay. This means marketing needs to take a holistic view of the 4Ps of marketing and understand the Place (or customer profile, customer personas) that leads to the highest sales volume and revenue. Understanding what features, functions, and benefits affect willingness to pay, how marketing channels and messages affect willingness to pay, and what pricing strategy minimizes friction and maximizes revenue.
So this becomes very complex and is not easy at all. And this might be the reason that many companies just try a couple of different marketing messages and see what sticks - what leads to the highest numbers of leads. And then separately try a couple of different prices. But this is not good enough. If a company is fortunate, it works. But in most companies, it sort of halfway works, but not nearly as well as the company wants, so they just keep testing and testing.
The right way is to understand how the 4 Ps of marketing interact, especially how Place, Product, and Promotion affect what potential customers are willing to pay for a product or a service. Then marketing can lead the company to the most desirable marketplace (or, another way to look at it, the customer profile) with the optimum product features, the most effective messages, and a price that minimizes sales friction and maximizes revenue.
Product Management
Pricing is also essential for Product Management (sometimes, a company doesn't have product managers because they are a service company. But services are still being defined somewhere in the organization). Like in marketing, it's essential to understand what features, functions, and benefits of a product or service affect customers' willingness to pay to support a higher sales volume and higher revenues than other features, functions, and benefits. Of course, any company wants to develop or define the features and functions that lead to the highest sales volume and the highest revenue.
But obviously, product management also needs to look at the cost and the feasibility of developing or defining certain product features and how these affect the cost of a product or service. Thus, it becomes crucial to find the best compromise between willingness to pay and cost, and there will always be a compromise. But if a company doesn't know which potential features, functions, and benefit leads to the highest willingness to pay and therefore supports the highest possible prices, how can that compromise be accurate? Even if it is a qualified guess based on experience, guessing will not be accurate enough. Asking a dozen potential customers, many of whom will probably lie or not tell the whole truth, is not cutting it either. Thus, companies need to determine their willingness to pay, how various features and functions affect willingness to pay and therefore affect the price they can charge, and how the Price affects the profitability of each feature, function, and benefit.
Sales Department
Finally, we get to pricing as it pertains to sales. Salespeople almost always perceive that lower prices will lead to higher sales volume and that an increase in sales volume is so high that it also increases company revenue. That happens sometimes, but not very often.
The Price of a product or service is the most powerful message of its benefit. So if prices are already too low, a further reduction of Price will lead to lower sales volume. If prices are too high, then lowering the Price will lead to a higher sales volume, but not necessarily higher revenue. And with higher sales volume comes higher cost - so profitability tanks.
Thus, a price leads to the maximum sales volume, not too high and not too low. That is the price that matches your customer's willingness to pay.
A Holistic View of Pricing
Companies need to adopt a holistic pricing view since pricing is derived from an accurate and detailed understanding of willingness to pay. Pricing affects every aspect of a company's operation. And this is also why pricing, when done right, allows a company to focus on the right customers, with the right product or service, the proper marketing and sales, and the right pricing strategy - all combined, taking the company to the next level!
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