What's the Role of Finance in Product Pricing?
The role of finance in pricing is a powerful one and for several reasons. For one, no one else within the organization has quite the influence of the finance department. They work closely with all departments and can leverage their insights to achieve better pricing success. Finance teams can take the lead in valuation to direct and oversee all pricing activities within the company. They proactively find and fix all profit loopholes, including sales, product lines and even accounting. Let’s explore how finance plays a key role in sales and marketing strategies. 💡Key Takeaways: Finance, sales and marketing teams can work together to set disciplined price execution, implement new processes and define price boundaries to avoid reps arbitrarily giving differing prices. Finance professionals know what owners, investors and stakeholders expect in overall returns. They use margin guidance and the margin floor to meet targets. Pricing committee participation ensures effective price monitoring. It is also how finance professionals become price leaders, vital to the overall success of the companies where they work. The Role of Finance in Sales and Marketing Strategies In some companies, sales managers make pricing decisions based on feedback from salespeople working in the field. Without effective pricing processes, salespeople often make intuitive pricing decisions. Source: Green Light Unfortunately, sharp price drops are common, but chaotic due to the pressure of closing new deals and reaching sales quotas. Set pricing based on insights from analytical data and industry standards, not on whether the sales reps are giving special discounts to close deals. Working closely with sales and marketing, finance teams can support the repair of faulty systems and bring discipline and transparency to pricing decisions. Here's how finance professionals can help sales and marketing teams with pricing decisions: Disciplined Price Execution: With so many factors influencing a company's bottom line, choosing the best method to price any given product and achieve its desired profitability can be challenging. However, disciplined price execution depends on the price sensitivity of particular products or the willingness of customers to pay different prices for products without impacting demand. When they leverage their business acumen and analytical abilities, finance teams can help develop sophisticated business rules and tools to quantify price sensitivity, assess customers' willingness to pay and improve prices. Documenting and Implementing New Processes: Without robust processes to guarantee disciplined pricing and price execution, the consequences of not adhering to pricing principles for the organization are too significant to ignore. Finance can help create processes and tools for documenting, monitoring and communicating incentive systems, appropriate discounts and spreads. That way, sales teams submit and substantiate any pricing changes for approval. Define Price Boundaries: Businesses often use historical data, such as cost information, to set prices. On the anniversaries of each contract and when considering the price, most of the time, these companies rarely calculate the "costs to serve" each customer. It is a simplistic approach that disregards the consumer's perceived product value as an essential factor in determining the final prices. Finance can monitor to see if price points are too high or too low. With scenario planning activities, the finance department can execute test-and-learn plans that help set pricing limits. How Finance Guides Pricing Decisions One of the key financial metrics constantly measured and monitored by a business is profitability growth. For any company, profit and positive cash flow are critical, and with a company that does not initially have investors or financing, profit may only be its capital. For these organizations, product pricing is vital for their financial success. Fluctuations and special deals granted by sales for target attainment are detrimental. Business failure is imminent for these companies without sufficient cash flow or the financial resources to operate and maintain a company. Finance teams play a critical role for these companies when setting pricing. Large corporations also focus on profitability growth. While pricing isn't as critical to keep the doors open, ensuring maximum profits for the company and its stakeholders is vital. Source: YouTube We've reviewed the role finance professionals play in helping salespeople better understand the importance of sticking to the pricing set by the organization. Let's review how finance professionals guide pricing decisions based on what's best for the organization. Margin Guidance Finance knows what owners or investors expect regarding overall returns. They can offer this guidance to price managers who can ensure that their gross margins across all of their products meet that margin target. Margin Floor Some businesses set margin floors and will not accept any deal with a margin lower than this floor. Most finance experts are not big fans of margin floors as occasionally businesses are willing to take a loss in some area to gain profits. However, one of the roles of finance is to reduce risks for companies. Pricing Committee Participation Some businesses have a valuation committee where participants from various departments occasionally meet to confer and enhance pricing practices. Finance professionals should be part of the pricing committee. When changes in valuation methods get proposed, finance plays an essential role in forecasting the financial impact of such changes. Price Monitoring Price monitoring is where financial and valuation managers can and should work closely together. Finance continuously collects and analyzes business data. Both teams must consider pricing data to help them comprehend the business's health. For example, tracking average discounts per product can indicate that market conditions are changing. Another indicator of market movement is the win/loss ratio. There are multiple KPIs or metrics that financial and valuation managers need to track. Source: Vena Agile Scenario Planning for Improved Business Decisions Test your business decisions with Vena’s agile scenario planning. Check your current product pricing against several possible scenarios so you can determine the best course of action when market conditions change. You'll still have some unknowns, but those variables will become more manageable with Vena. Excel at Product Pricing Plan for future profits with confidence. With Vena Scenario Analysis Software, you'll understand how your pricing decisions today affect tomorrow's profits.