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Pricing and commercial strategy

July 29, 2013

In an article, “Thinking Twice About Price”, The Economist suggests that very few companies have a formal pricing policy. While I disagree with this contention (I have never worked for or with a company that did not have policy in this area), my experience is that very few have a pricing policy that is effectively linked to a commercial strategy.

The Economist makes the point that there are three core ways in which companies can seek to improve. One is through increased sales; another is through cutting costs; and the third is via higher prices. They suggest this third route is frequently overlooked and proceed to offer examples of ways that pricing should be used in this ‘age of austerity’, since the other two mechanisms may no longer be effective.

However, the examples that The Economist then offers all reinforce the point that it is commercial strategy, rather than pricing policy, that is missing. For example, they highlight the sales-at-all-costs mentality that prevents companies walking away form deals; or the failure to link price with distinctive value propositions; or the ineffectiveness of market segmentation that leads to a ‘one price fits all’ mentality; and the failure to consider ‘unbundling’ so that customers can select the options that they most value.

These areas – and others – have each been discussed at some point in this blog, not in the narrow context of pricing, but rather as elements of a commercial strategy based on market understanding. To me, the problem is not lack of pricing policy; it is once again the tendency to develop ‘specialisms’ that operate independently within the business. How can a ‘pricing expert’ ensure maximum returns if they have little or no insight to broader market considerations? They are limited by their expertise, in just the same way as the lawyer, the project manager, the category manager or the myriad of other ‘specialists’ that populate business today. The real issue is the absence of the commercial oversight that should be offered through a generalist asking the right questions and challenging the narrow wisdom of ‘the expert’.

  1. Amit Vedhara permalink

    Agreed in that pricing strategy is a subset of commercial strategy. A good pricing strategist is fully aware of this. However very few firms actually have a commercial strategy team, so the Pricing discipline has grown to fill the void where commercial strategy should sit and has become a broad church rather than a narrow specialism. If done well the value proposition, product map, comms and sales execution amongst others, will all be aligned to a commercial/pricing strategy that seeks to monetise a firms competitive situation – led by the pricing team who should be designing solutions end to end.

    • Amit
      thanks for your comment and confirmation of the importance of integrating pricing policies as a component of commercial strategy. Thanks too for observing that, in your experience, pricing professionals are having to expand into this commercial role due to the absence of others fulfilling it.

      Historically, I think many companies did have a commercial strategy team which incorporated pricing responsibility. Certainly that was my early experience in automotive and aerospace. But newer industries – such as IT – often broke with that model. Fast growth and high demand meant that pricing strategy was determined more by revenue and profit optimization than it was about alignment with market needs; indeed, customer requirements that did not fit the high-margin model were typically ignored or dismissed. Perhaps this is an inevitable feature of industries driven by new technology, but it is a source of real weakness in mature industries.

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