Pricing Department and Strategic Profitability

Pricing Department and Strategic Profitability

Having progressed from historically being part of the accounting or finance function within many organizations, today pricing is often its own strategic business unit, providing insight into a myriad of decisions, strategies and programs. This new strategic role of pricing is evidenced by the reliance on analytics, business intelligence, pricing execution, enforcement and optimization (Carricano, Trinquecoste, Mondejar, 468). The pervasive use of enterprise software underscores each of these areas, as companies are relying on their pricing departments to mitigate lost gross margins, ensure their supply chains are efficiently run, and create greater levels of efficiency in their Sales & Operations Planning (S&OP) processes. The intent of this paper is to explain the evolving role of the pricing department in organizations, driven by the need to ensure greater levels of profitability and supply chain efficiency.

The Role of the Pricing Department

From being focused on product-related pricing and the definition of gross margins and costing structures to concentrating on both the sell-side and supply-sides of a business, pricing is now a strategic initiative in many companies (Marn, Roegner, Zawada, 26). When a pricing department is implemented well, it spans the entire spectrum of a given organization's value chain and unifies pricing as a strategy for the long-term. It also acts as a catalyst for better decision making and more consistent approaches to decision making (Davenport, 122). This is because a taxonomy or framework begins to emerge from pricing management when done with analytical rigor and consistency. Dr. Tom Davenport of Harvard University has defined a four-stage model that includes Identification, Inventory, Intervention and Institutionalization of analytics-driven data and information that seeks to put pricing into context for an organization. His model also encompasses the most critical links in any organization from a pricing standpoint, and that is in the areas of supply chain management and distribution channels or multichannel management (Davenport, et.al.).

Pricing departments concentrate on supply chains as they are a critical link to the broader Sales & Operations Planning (S&OP) process that orchestrates how companies fulfill product orders. Supply chain analysis of pricing, gross margins, competitive analysis of comparable supply chains, and the benchmarking of supplier price execution over time can deliver significant profitability gains, as the analysis of Stanley Works illustrates (Davenport, et.al.). Creating secondary strategies for ensuring adequate product availability at an affordable price, completing pricing optimization of sourcing and procurement contracts, and understanding the price elasticity of product categories are all critical for profitability (Marn, Roegner, Zawada, 26). Advanced pricing management of suppliers manages all of these tasks including supply-side elasticity are considered state of the art in pricing management today (Carricano, Trinquecoste, Mondejar, 468). From a supply chain standpoint, pricing departments must also create a high level of communication and collaboration across a business as well. Their role is to be the orchestrators of internal effort to manage suppliers to pricing and margin levels, ensuring consistency and focus on share goals. This is one of the primary reasons pricing has now become a strategic initiative within many businesses. For change to occur in how companies do their pricing strategies, it often takes a senior executive to manage the change in processes and systems to ensure pricing becomes strategy and shifts away from being tactical in focus (Marn, Roegner, Zawada, 26).