One of my fundamental beliefs is that the strategic marketing team—not sales, finance or operations—should own pricing. The reason is that marketing is best equipped to set the optimal price and maximize an offering's lifetime value.
What Happens If Sales Controls Price?
Historically, most salespeople are compensated based on sales revenue. Because lower prices can 1) attract more customers and 2) help sales overcome customer objections, the sales team is naturally incentivized to lower prices. Even if a company has made a shift to compensating sales on margin or profitability, there are additional problems with sales owning pricing.
One of the biggest problems is that salespeople only have insight into their target customers or what’s happening in their particular territory or region. What is true for them does not necessarily hold true for other markets, other territories, or the competitive situations of their colleagues. This isn’t to say sales shouldn’t have leeway to tweak price so they can respond to local market conditions. But that leeway should be limited, because individual pricing decisions can sub-optimize pricing on the aggregate, which can damage overall profitability for the company.
What Happens if Operations or Finance Own Pricing?
The operations and finance teams look at pricing from a cost of goods sold perspective. For example, they’ll ask, “What does it cost us to manufacture this product?” or maybe, “What is our total cost to serve this customer, including cost of goods sold?” But these questions don’t take into account the value delivered to the customer.
Operations and finance will believe that they can optimize earnings best because they understand cost. It’s not that you should ignore cost. If your product provides the customer $100 worth of value but it costs you $150 to deliver the product, then you’ll lose money on that product. But cost should definitely not be your only consideration.
Why not? Because the best way to optimize earnings is by understanding value, not cost. Understanding value comes from asking these questions:
- What is the business problem we’re trying to solve?
- What are the customer’s other alternatives?
- How much is it worth to the customer to solve that problem relative to other alternatives (including “do nothing”)?
Only after you’ve considered all of these questions can you determine what your optimal price should be. And it is the job of the strategic marketing department within a company to answer these questions.
Why Marketing Should Own Pricing
The strategic marketing team needs to understand value. They’re driving product development and asking key questions to find out how to increase value for customers (for example, whether or not to add a new feature).
Setting your optimal price means that you are maximizing the total lifetime profitability for an offering. In turn, that means you have 1) a good business case for your customer to buy, and 2) a good economic return for your company.
If you’re in an organization where strategic marketing doesn’t control price, it’s time to justify to your senior leaders (and the sales team) why you should.
