Blogcast #3: Should Finance Influence Pricing?

<p><span style="font-weight: 400;">To start with, I strongly believe finance should NOT set prices.</span></p> <p><span style="font-weight: 400;">Now don’t get me wrong – finance cares a great deal about pricing, because part of their job is to monitor profitability. They need to determine how profitable the company will be, and pricing is a major part of this. They</span> <em><span style="font-weight: 400;">care</span></em> <span style= "font-weight: 400;">about pricing, but they should not SET prices.</span></p> <p><strong>Here’s the problem:</strong> <span style= "font-weight: 400;">those in finance don’t know the real value of their products. If they set prices, the only strategy they use is cost-plus pricing. Anybody who knows anything about pricing knows this is the wrong answer if the goal is to maximize profit.</span></p> <p><span style="font-weight: 400;">This isn’t to say finance teams can’t play an important role in pricing. There are many ways, including:</span></p> <p><strong>Margin guidance:</strong> <span style= "font-weight: 400;">Finance knows what investors/owners expect in terms of overall margin. They can give guidance to those in charge of pricing, who then can ensure the blended margin, across all of their products, achieves the margin goal.</span></p> <p><strong>Margin floor:</strong> <span style= "font-weight: 400;">Some companies set a margin floor, meaning they won’t accept any business at a margin below that level. I’m not a huge fan of margin floors, because sometimes companies can accept business at a loss in order to gain other business at a profit. However, one of the roles of finance is to mitigate risk for the company; margin floors help significantly in this capacity.</span></p> <p><strong>Price monitoring:</strong> <span style= "font-weight: 400;">Now is where those in finance and pricing can and should work closely together. Finance</span> <em><span style= "font-weight: 400;">constantly</span></em> <span style= "font-weight: 400;">collects and analyzes data about the business.