We are often asked by clients and prospective clients whether it is better to have a centralized or decentralized pricing function. Of course, without much more information the only answer to that question is, “It depends.” That said, we almost never recommend completely centralizing or decentralizing pricing. We generally believe a hybrid solution works best, with some level of centralization and some degree of local autonomy. The degree of centralization is dependent on the types of customers, capabilities, and competitors in the company’s business units, product lines, and geographies, and their respective pricing strategies.
The reasons for a hybrid are simple. While everyone in the company understands what a price is, they do not all have the background or training in strategy, customer behavior, pricing analytics and pricing processes to set prices effectively and capture all the value shareholders deserve. To have any consistency in the development and execution of pricing strategy, there must be some level of centralization. Conversely, centralized tools are not perfect and can fail to quickly capture customer or situation-specific nuances that a local sales team can address. So, at a minimum, we recommend some level of a central team that provides the overall pricing ethos and perhaps strategies, analytics, and processes. We also recommend at least some limited authority to make pricing decisions at a local level to quickly respond to unique customer or competitive situations.
Within such a hybrid structure, the degree of centralization still must be addressed. When the customers are the same or similar across different business units and/or geographies of a company, a more centralized pricing function is useful. A central pricing team can ensure that a common strategy and pricing architecture is maintained and ensure that specific prices address specific local markets. That means prices may be different between markets and customers, but the variation in prices between sizes and types of customers will be consistent. It also means variations in pricing for different volumes will be consistent for similar products.
With common customer types across multiple parts of a business, a central pricing function provides other advantages. It ensures customers who deal with multiple parts of the organization are not confused by the pricing, it enables the company to capture and share more competitive information, and it provides more options to create incentives for customers to expand their purchases.
At the other end of the spectrum are business units or geographies that are quite dissimilar. As an example, consider all the divisions of GE. The specific customers and industries in which they operate are different, the capabilities needed to serve the customers are different, and competitors are different. In such situations, pricing strategies and pricing architectures are not likely to be the same. It would not make sense to have a central pricing group try to serve all those various markets. It might make sense to have a company-wide pricing council to share best practices in analytics, tools, and processes, but it should be backed up with division-specific pricing teams that manage their respective division’s processes, analytics, and measurement, along with some limited degree of local autonomy.
There are many permutations of a hybrid pricing structure. Whichever degree of centralization is adopted, it is important that all participants understand the company pricing strategy and value proposition as well as their own roles and the limits of their decision making. For example, a company whose business units or local offices have significantly different customers and competitors might be better served by a structure that provides a local office with wide latitude to set or change prices. However, that local office must do so while maintaining integrity with the overall pricing strategy. The central team can provide a price management process, high-level target prices, and tools that enable the local team to quickly understand the impact of any pricing decision they make. The central team could also measure pricing effectiveness and compliance with company strategy plus win-loss rates, and it could provide a process for capturing competitive intelligence and a customer-incentive structure that encourages purchases from multiple locations, business units, etc.
Alternatively, in a highly centralized environment with very limited local pricing authority, the central team should provide specific target prices by market, customer and product, plus tools and workflows that enable the local teams to respond quickly. Equally important, the central team must provide an exception or dispute management process. As I mentioned earlier, models are not perfect and there will likely be occasions where the local team believes it is necessary to go outside their authority limits. The tighter those limits, the more important it is to have an expedient process to manage those disputes.
It is often said that the most common answer from a consultant is, “It depends”, and I have just given you that answer. However, that is the correct answer when discussing whether to centralize pricing. There is not a one-size fits all solution. Consider the factors that affect how much centralization makes sense and take logical incremental steps toward whatever that hybrid solution is. If you ensure that everyone understands your strategy as well as their roles, responsibilities, and authorities, you can continue to improve your pricing.
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