It’s important to start with stakeholder alignment because it will set you up for success and make things easier later. If you don’t start here, you’ll discover this the hard way: No Alignment = No ProgressTo get going, you need to know who owns pricing. It’s really a multiple choice question with these possible answers.
- Finance
- Sales
- Product
- Marketing
- Executive team
- All of the above
- All of the above, so really, none of the above
- Seriously nobody does
In my experience, pricing is likely owned by one of the first two departments listed, Sales or Finance, and they run pricing in somewhat of a silo. Most other companies fall into bucket #7 where many functions feel somewhat empowered to establish new pricing rules or make changes which results in a chaos of unnecessary complexity. In this case, pricing information in disparate systems like collateral, Salesforce, and the ERP system do not match which creates a downward spiral where it becomes too big of a problem to solve, cans keep getting kicked, and things get worse. So, let’s do it the right way instead, right?
Who Should Own Pricing?
What matters to do pricing right? A lot…
- Alignment – Alignment is key for many reasons. Without alignment on decisions, there is a strong likelihood that a pricing decision being made is sub-optimal or plain bad because pricing has effects on so many departments and frequently comes with unintended consequences. One famous example from India created an economic term for this important factor https://en.wikipedia.org/wiki/Cobra_effect. Alignment is also critical for implementation. If a department disagrees with a pricing change, there a myriad ways of roadblocking your initiative passive aggressively. Sales can use discounting to sell using an old price. Sales operations can de-prioritize your administrative changes. The possibilities are endless. Get agreement from the heads of your stakeholder departments and you won’t have to deal with these issues.
- Customer insights – Customer insights should form the basis of any pricing change, not the incremental dollars that your company will make if you implement a change. Assuming that you can charge customer more money for the same products without any of them leaving always looks good in an Excel document, but usually looks bad in hindsight when results differ from overly rosy projections. You need to know that customers won’t churn en masse due to your changes – so that you can practice profitable pricing management and to cover your ass in advance with data.
- The pricing bag of tricks – There are a lot of ways to price products. I’ve done my best to cover them in this section. It’s not important, at all, to know them before you start managing pricing, but you should survey all your options when trying to come up with a pricing solution for your company’s unique challenges and opportunities.
- Financial modeling – Someone needs to look at what will happen to your profit & loss (P&L) and cash flow statement when you make pricing changes. The P&L will tell you whether the company makes more money as a result and the cash flow statement will tell you how it affects when the company gets dollars in the door versus costs – which is particularly important if you are a cash-strapped startup.
- Business analysis (Salesforce + Business Intelligence/Analytics) – This is a key area for insights on how your customers are using your product. Whether you’re doing something basic like checking how many customers have bought each product or cluster analysis to determine which characteristics or behaviors are predictive of future customer churn. Either way, somebody has to run the numbers. BA is particularly helpful if your company uses metric-based pricing as you’ll need to know how pricing and packaging changes will cause customers to hit the volume caps for their pricing tiers and be upgraded – making the company more money.
But, here’s the secret! You don’t need to personally have all of those skills listed above. If you can form a pricing team, or as I prefer to call it, a pricing committee, then the rest of the team can bring those skills to bear on the pricing opportunities that you need to address.
- Focus on leadership needs
- Outsource the rest
Starting a pricing committee actually accomplishes both of the key challenges of managing pricing in one stroke. The committee allows you to outsource the skills that you lack from the list that’s “too long for one resume” and it gives you a vehicle for achieving the alignment you’ll need to make the right decision and getting others to agree with your decision.
Assemble your dream team to tackle the five areas of work needed by the committee. Here is my suggestion for how to manage it
- Alignment > You
- Customer insights > You + Sales
- The pricing bag of tricks > The Internet (this website included)
- Financial modeling > Finance
- Business analysis (Salesforce + BI) > Analytics
Pricing committee components
1. Form the team
a) It’s important to define who is a member of the pricing committee for two somewhat obvious reasons. The people in it, need to know that they’re in it. But also, people across the company need to know who is on the committee so they know where to take their pricing problems so they can be acknowledged and potentially fixed.
b) A RASCI or RACI can be very helpful within a pricing committee structure so that roles and levels of involvement are more clearly defined.
R – Responsible – The “R” is responsible for pushing the agenda of the pricing committee forward and making recommendations or decisions. “Recommendations” are decisions that need to be approved by either the “A” or executive team to become official.
A – Accountable – The “A” is the executive sponsor of the executive committee. Find a C-level executive whose job is complicated by a current lack of clear ownership and to get your “A.”
S – Support – The “S” team-members are members of the team who will meaningfully contribute to decisions or recommendations made. In my experience, these could include people from Finance, Accounting, Analytics/BI, Sales Ops, and the owner of systems of the biz apps whether a product manager, IT admin, or other role. These team-members, along with the “R” form the core of the pricing committee.
C – Consulted – The “C” pricing team members should at least include multiple people from sales and customer success for two reasons. First, the view looks very different from the VP position than it does as a seller. You need insights from across the sales org to ensure that all risks and upsides to making a pricing change are captured – particularly since your sales teams may have different customer types or sell different products/bundles or through different channels. Ask your sales team so that you can rely on their knowledge and get them onboard instead of quixotically trying to internalize what they know to avoid having a few more conversations. Do the right thing. Talk to Sales a lot. Accounting may also be in this bucket instead of “S” depending if your financial systems are fairly simple.
I – Informed – The “I” group is made up of the executive team plus anyone whose job is going to be affected at all by your pricing change and hasn’t already been captured by one of the other groups. One easy callout here is that all of the sales and customer success that wasn’t consulted before making the change will be in this group. And fortunately for you, you already consulted with a few of their most knowledgeable colleagues and their managers so getting them onboard won’t be hard. When updating this group on your change, it’s important to put together a training deck, an internal FAQ, and in rare cases a customer-facing FAQ that explains 1) what’s in it for them (commission impact) 2) the rationale for why you made the change 3) timing of the change, including whether existing deals or deals in the pipeline are impacted by the change.
c) Time Commitment – Being on the pricing committee is basically a part-time job. These people presumably already have full-time jobs so that poses a small problem. Along with these people and their managers, you’ll need to define how much of each “S” person’s time can be allocated to pricing on an ongoing basis.
d) Recurring Meeting – Set up a recurring weekly meeting for the pricing committee. Every week, you should be reassessing the Pricing Roadmap (more on that later), discussing analysis done by team-members, working on problems collaboratively around a whiteboard, identifying potential solutions from your pricing bag of tricks to consider, and assigning homework of further analysis along these five lines 1) Customer insights 2) Competitive Analysis 3) Stakeholder feedback on ideas 4) Customer impact analysis 5) Financial analysis 6) Implementation project scoping. Those first three items are generally your problem, unless someone else on the team has a closer relationship to the person. The other three issues go to Analytics, Finance, and Sales Ops or an equivalent department.
e) Pricing Roadmap – This works just like a product roadmap, which you’re probably very familiar with. Start with a list of all pricing problems and potential opportunities. Now score them with a basic system like Low, Medium, High for both estimated business impact and urgency independently. Now add a column for implementation difficulty. Sort the list. Which projects show up at the top? Investigate those first and plan project times for each. That’s your roadmap. The projects that didn’t make it from your prioritization list into your roadmap are your backlog. If this sounds a lot like the product management process, it should. Using familiar patterns makes it easier for your stakeholders to follow along and stay aligned – which, in case you forgot, is the most important factor in pricing management.
2) Write the pricing principles down
a) Pricing principles are guardrails for the pricing committee to work under. The idea here is to get the company to define your goals and what to hold sacred. That way it’ll be much easier for you to know what’s inbounds or a superior change because you have defined goals to seek. Talk to someone who is in board meetings to get an idea of what financial and growth factors to prioritize. Then get your pricing committee members in a room and white board your way to an outline and do the rest.
b) Don’t make this a company mission statement. If your pricing principles sound like “provide the very best service and the lowest price possible,” then you did it wrong. You need metrics. Which ones are you trying to drive up, down, protect, or just consider.
3) Get an executive mandate
a) Estimate the potential benefits and costs in people time to pursue the pricing committee. Exec teams need to know that their investments will pay off first and foremost.
b) Define the scope of the committee. Are you managing pricing for software? Services? Strategic deals done by business development? Channel pricing for resellers? Discounting? Consider all of the pricing nuances at your company and draw the line. Remember that you don’t have to take on all of pricing in fell swoop, particularly since you’ll likely have a pricing roadmap backlog from the beginning, so be comfortable saying no to some scope in order to keep it manageable and prove the value of your team.
c) The executive team needs to agree on the pricing principles. They don’t need to be the ones that you drafted, but they have to agree on something. Otherwise, it’s unclear what you should optimize for and what to sacrifice. Your changes aren’t going to help every metric or every person in the company, but they should drive the business in the direction that the executive team wants to go. Frankly, you’ll make people’s jobs harder sometimes, and you need alignment at the top so that everyone knows that you have the exec team’s backing.
d) The exec team needs to also agree on the RASCI. If a department head feels like his team’s point of view is not being reflected in pricing decisions, it’s a problem. The easy solve is to make the pricing committee a bigger tent by adding people into the “S” or “C” groups if asked.
e) Set a recurring exec meeting for every 4-8 weeks. This your time to get recommended changes formally approved and backed, show off the team’s work, and communicate implementation timelines. I think the most important aspect of this recurring meeting is the ability to use it as a forcing function for the committee to get work done as well as to apply pressure when needed to get stakeholder feedback on a timely basis in advance of these meetings. This cycle of preparation for the executive meetings and followup implementation afterwards is the rhythm of getting pricing work done and changes into market.
The Executive Deck
