Pricing Czars vs. Institutionalized Pricing Strategy

Pricing Czar vs. Institutionalized Pricing Strategy 
by Michael Hurwich, President of SPMG

PRICING Czars. They sit in their offices, colossus' spanning the universe. Salespeople telephone them begging their indulgence as they present their deals – deals which could make or break performance bonuses and incentives. Discounts are requested, competitive information reviewed, special requests are considered and then, with pontifical certitude, a decision is rendered.

Anointed by the CEO, a price czar is the absolute final arbiter on any deal done on a day-to-day basis. Ideally, the czar is a competent and benevolent despot who will advance the cause of the organization.

Often they emerge within an organization over a number of years and are generally acquire considerable experience, a track record of selling success, and an intimate knowledge of customers. Eventually, by virtue of history, the organization turns to him or her, time and again, whenever a tough decision has to be made on a specific deal. This pattern can become so widespread and routine that the individual, de facto, becomes a pricing czar.

Sometimes the position is institutionalized by the CEO and the power to finalize deals is formally granted. This requires the absolute trust of the Chief Executive because any overturned decision has the potential to undermine the authority of the czar, perhaps irreparably. A successful pricing czar requires the absolute respect of the sales force; otherwise this individual can significantly demoralize their efforts in the field.

Advantage:

There are a number of factors to weigh when an organization is considering institutionalizing a pricing czar. The big attraction is that it provides a simple, quick fix to an often-chaotic pricing situation. The pricing environment is generally characterized by a lot more deal making, special off invoice discounts, and special service requests. If these special arrangements are not managed properly, pricing can quickly spiral out of control and result in an overall collapse of profitability. Rather than investing in the monumental task of installing sophisticated internal and external-tracking mechanisms supported by adequate controls, it is tempting to turn to “good old Charlie” who has been with the company since the dawn of civilization and make him a pricing czar. 

Drawbacks:

There are drawbacks to this position. 

1. Evaluation

One of the immediate ones is evaluating the performance of a pricing czar. No company has ever structured a test whereby half the deals are turned over to a czar and the other half are managed through a more sophisticated systems/management structure. So a lot of faith is required in the setup to sustain it over time.

2. Disconnect

A further difficulty comes when the organization wants to take a new direction with its overall marketing strategy. Often it will become apparent that brand managers, who develop the price positioning strategies and have ultimate profit responsibility, are not in control of, or possibly even aware of, the actual prices being paid in the marketplace. They quickly come to learn the limitations of developing marketing strategies with only three of the “4 Ps” at their disposal.

3. Continuation

With all of the knowledge and decision-making resting with one person, another problem is inevitable: what to do upon the czar‘s departure. Many organizations have gone through wrenching transitions after losing their czar, because new systems and controls require significant time and effort to design and implement. As an additional hurdle, the overall approach to pricing may have become so individualized to the czar, it cannot be replicated. The alternative to a pricing czar is to institutionalize pricing strategy.

Institutionalizing a pricing strategy 

Institutionalizing a pricing strategy provides the context and guidelines for day-to-day decisions. This requires comprehensive customer research and tracking, detailed financial analysis, competitive positioning, and a careful tie-in to business objectives. In addition, if the strategy is communicated effectively it will, in and of itself, improve organizational pricing performance.

To ensure the strategy becomes ingrained and that positive results are maximized, it should include a policy outlining the steps to be taken in determining and negotiating prices, the assignment of responsibilities, and a definition of the organization‘s pricing objectives. Measurement mechanisms must then be installed to monitor performance and keep the organization on track.

With these elements in place, an institutionalized pricing strategy can have dramatic impact on the bottom line, much more than the reliance on a pricing czar. The czar may be a good stopgap when an organization is scrambling, but a firm should invest the resources for the long term to build and execute a sound pricing strategy.