A blueprint for designing your pricing operating model

The six dimensions of the operating model are complementary in nature, so organisations should aim to lift maturity across all six. However, an overinvestment in one dimension might substitute lower maturity in another dimension. One company can thrive by hiring talented people with diverse competences and allow them to run annual jobs to be done without formalised processes. Another company that might not have access to the same talent will have to substitute with activities organised in a detailed annual wheel and step-by-step procedures.

The six dimensions are: 

(1) Governance and ownership, (2) Organisation and leadership, (3) Processes, (4) Skills and competences, (5) Tools and technology and (6) Performance management.

#1 – Governance and ownership

The first dimension to consider when designing a pricing operating model is governance and ownership. Here, companies must make choices about who has the authority to make pricing decisions and the mechanisms by which these decisions are executed and approved.

Effective governance and ownership ensure that pricing decisions are made in a controlled, strategic manner and are aligned with the organisation’s overall goals, preventing ad hoc reactionary price moves that could undermine the company’s market position or profitability.

For instance, the top management may delegate the accountability for reviewing pricing tactics to a cross-functional committee with representatives from sales, marketing, finance and product development. This committee would consider market conditions, production costs, competitor pricing and overall business strategy to define tactics that are competitive and profitable, whereas a local sales manager may be delegated the authority to discount deals within certain thresholds.

Clearly defined mandates and approval chains for changes on list prices, discount policy violations, data management updates etc. will ensure that all decisions are vetted by the appropriate levels of management.

#2 – Organisation and leadership

The second dimension tackles how to organise and lead the people who are involved in pricing decisions. This involves creating formal cross-functional groups that bring together diverse expertise to enhance pricing decisions. The structure typically includes distinct roles and responsibilities and its place within the larger company hierarchy. This sometimes calls for a dedicated pricing team, but most times, it is about setting up the right meetings and committees and mandating leadership to effectively drive cross-functional collaboration.

• Cross-functional meeting cadence: Regularly scheduled meetings that involve key stakeholders from different departments (e.g. sales, finance, marketing and product development) and ensuring that pricing decisions are informed by comprehensive insights from across the organisation.
  
• Organisational belonging: Pricing might be a function within the product department, or it might be part of a dedicated commercial excellence team. The placement is largely driven by the type of pricing game the company is playing, but it should also reflect the company’s pricing strategy and ensure that the team has the necessary influence and resources.

By designing a well-organised pricing function with clear roles, regular cross-functional collaboration and strong leadership, companies can ensure that their pricing strategies are not only well-conceived but also effectively executed across the organisation. This setup promotes a culture of pricing excellence that can adapt to market changes and drive long-term profitability.

#3 – Processes

The third dimension turns the attention to the ways the jobs to be done are executed, including the sequence. Developing standardised processes for setting, reviewing and modifying prices along the product and sales value chains is important for the timely and precise execution, delivering consistency, reacting to market changes and upholding profitability. Both annual processes and standard operating procedures must describe the standardised methods and steps that an organisation follows.

For annual processes, an organisation might develop a comprehensive pricing review that coincides with their fiscal planning. This could involve multiple steps:

• Data collection and analysis: Gathering historical sales data, market trends, competitor pricing and cost information to form a factual basis for pricing decisions. Using the collected data to analyse the performance of current pricing strategies, identifying areas where adjustments may be needed.
• Tactical developments and price setting: Setting new pricing goals based on the analysis, which could involve increasing margins, capturing market share or entering new markets. Determining specific price points for products or services, often using pricing models or software to ensure prices align with the strategy.
• Price change implementations: Rolling out new prices, often timed with new product releases, market entries, the start of a new fiscal year or triggered by relevant external events.

For standard operating procedures, the organisation should detail the routine tasks involved in price management, ensuring that all team members can follow them consistently. These might include:

• New product price setting: A procedure for introducing prices for new products or services, which could involve market research, value and cost analysis and competitive benchmarking.
• Price change requests: A formal process for dealing with price change requests, detailing who can initiate the request, what information must be included and how it is evaluated. A change request could come from a range of triggers such as shifts in market demand, cost fluctuations or new competitive threats.
• Communication protocols: Guidelines for communicating price changes internally and externally, ensuring that sales teams, customers and partners are informed in a timely and clear manner.

By detailing these processes, an organisation ensures that pricing activities are not left to chance or individual discretion. Instead, they become repeatable, predictable and aligned with the strategic objectives of the business, allowing for a responsive and dynamic approach to pricing that can adapt to both internal and external pressures.

#4 – Skills and competences

The fourth dimension focuses on people. Pricing competences refer to the hard and soft skills that pricing professionals must attain to effectively carry out their roles and responsibilities. Recruiting and retaining the right competences is crucial to ensure that teams can develop, deploy and adapt pricing. The pricing professional must be a jack of many trades:

• Value understanding and strategic thinking: Pricing professionals must be able to develop pricing strategies that support the overall business strategy, considering factors such as market positioning, competitive landscape and value propositions. Having the skill set to substantiate and quantify how different customer segments derive value from the company’s offering is essential when exploring new ways of sharing this value with customers through different pricing models.
  
• Analytical and financial acumen: Strong quantitative skills are necessary for analysing data, understanding market trends and making evidence-based pricing decisions. This includes financial acumen and proficiency in data analysis, statistical modelling and the ability to translate complex data into actionable insights.
  
• Collaboration, communication and change management: Pricing is a cross-functional endeavour that requires input and buy-in from various departments. Team members must be able to work collaboratively, respecting and integrating different perspectives to arrive at optimal pricing decisions. In this regard, effective communication is vital for explaining pricing decisions and ensuring stakeholders, from senior executives to sales teams, are aligned and informed.

When recruiting for a pricing team, it is important to look for candidates who possess or have the potential to develop these competences. Additionally, ongoing training and development opportunities should be provided to ensure that the team’s skills remain sharp and current in the face of changing market conditions and technological advancements.

#5 – Tools and technology

The fifth dimension is concerned with the tools and technologies that can enable the first four dimensions. As data velocity, variety and volume have increased in recent years, the adaption of sophisticated tools and technology has become more relevant. The right tools and technology can automate pricing analysis and price optimisation as well as enable robust price management that is integrated into the remaining technology infrastructure.

• Pricing analysis tools allow the pricing team to effectively analyse market data, customer behaviour and competitive prices. This might include features for data visualisation, statistical analysis and scenario modelling to understand the impact of different price tactics.
• Price optimisation tools can help identify profitable price adjustments. These tools often leverage advanced algorithms and machine learning to recommend prices based on various inputs such as cost structures, demand elasticity and competitive positioning, or they can be more rule-based in their application.
• CRM/CPQ systems play a crucial role in capturing and organising customer data, aligning pricing master data with customer behaviours, and tailoring offers to individual customer segments. Either integrated or standing alone, CPQ software must be tightly linked to the CRM system to streamline the quote-to-cash process, ensuring accurate configuration, pricing, quotation and billing aligned to customer specifications and current market conditions.
• The ERP system plays a critical role in integrating pricing with various other business processes. These systems enable the collection, storage and management of data from different departments. For pricing, ERP systems typically hold “the truth” about cost structures, inventory levels and financial data, allowing pricing teams to make informed decisions.

As the organisation grows and market dynamics change, the pricing tools and technology should be scalable and flexible to adapt to new requirements and evolving business needs. This may involve cloud-based solutions and modular architectures.

#6 – Performance management

The sixth and final dimension of a robust pricing operating model deals with performance management. The design of such a system involves setting key performance indicators (KPIs) that are directly tied to pricing, monitoring these indicators consistently, and managing team incentives based on their performance against these metrics. The goal is to measure the impact of pricing on overall business outcomes and to drive behaviours that support the company’s financial objectives.

• Defining the key performance indicators: The first step is to establish clear key performance indicators that reflect the objectives of the pricing strategy. These might include metrics such as margin improvement, revenue growth from price changes, price quality and discount levels.
  
• Monitoring performance: With the right indicators in place, the organisation must put in place systems and processes for monitoring these metrics. This could involve dashboard tools that provide real-time data, regular reporting cycles and deep-dive analyses to understand the drivers behind the numbers. The tracking should be designed to quickly identify deviations so that corrective actions can be taken.
  
• Aligning incentives: To ensure that those with responsibility for price execution are properly motivated to collaborate and achieve pricing goals, their incentives must be aligned. This could mean incorporating aligned pricing-related targets into bonus structures, commission plans or other reward systems across all functions involved in pricing. For example, foster collaboration between product and sales teams by aligning their incentives on both top- and bottom-line impact.

A sound performance management system for pricing should help solidify the link between actions and business results, encouraging behaviours that support the organisation’s financial health.

How to get started

When navigating volatile market conditions in pursuit of pricing excellence, we cannot underestimate the importance of maturing all six dimensions of the pricing operating model.

As you embark on the journey of designing a robust pricing operating model, it is crucial to approach this process with a structured mindset. Begin by defining your purpose and desired future state and then assess your current pricing capabilities and identify areas where your organisation could enhance its practices. Remember, the journey to pricing excellence is iterative and will require maintenance over time to be aligned with the overarching business strategy and goals.

Contact us if you need help to assess the impact of a customised approach that aligns with your specific business needs. We can help leverage pricing expertise to ensure that your organisation is well-equipped to navigate future market changes and drive long-term profitability.