Strategic price management is a mandatory practice for companies seeking to maximize profits. In many companies, pricing is seen as a bureaucratic task and receives little attention from top-level executives. It is common for firms in various sectors to determine product specifications and marketing strategies before setting prices for their market launch. Without a designated person in charge, pricing decisions are often based on outdated parameters such as a target margin above production costs or simply imitating the price practiced by competitors, without considering the perceived value by customers.

Why establish a pricing area?

The benefits of managing prices, particularly through a pricing team, have become increasingly evident. Evidence from foreign literature and our projects for companies in Brazil can prove that with good pricing management practices, companies can increase their net profits by up to 50% with just a 1 to 3% increase in revenue through pricing.

To achieve the gains mentioned above, strategic pricing management should be established respecting three fundamental pillars:

Responsibility: a pricing department creates the necessary and more impartial interaction between the finance, marketing, and sales areas of a company. A person responsible for determining prices facilitates conflict resolution and focuses on profit maximization, rather than less relevant goals for shareholders, such as total sales volume or percentage contribution margin.

Consistency: with consistent pricing policies and metrics, communication of the company’s intentions with its customers is guaranteed. An autonomous pricing area allows for the implementation of a sustainable discount policy. Exceptions can be made as long as they follow some clear rules.

Alignment with Strategic Objectives: strategy aligned with practice. A pricing area helps the company work in harmony with its strategic objectives instead of specific interests of one area or another.

What is the best structure?

While there are several factors to consider when creating a pricing area, three factors are essential in defining the best solution for a company:

One of the first requirements for deciding the best structure is to understand the market dynamics. The attributes for understanding this dynamic include the points below:
– Customer Profile: if the same customer buys several products from the same company, the pricing decision must take into account the need to buy a basket of products from their company and not focus only on one product.

– Product Nature: if all the company’s products are similar and share the same production line, a single pricing team may be sufficient. On the other hand, if a company has a series of products with very different attributes, each business unit should have its own pricing management area.

– Distribution Channels: the number of customers the company serves determines its sales channel strategy. The more sales channels a company has, the more necessary it becomes to coordinate prices between them. Conflict between channels has the potential to destroy any pricing strategy.

After analyzing the above factors, we can suggest that a pricing area can be defined in three formats: Centralized, Decentralized, and Hybrid.

– Centralized: a corporate area that defines the prices of all products and commercial policies to be followed by the commercial areas and business units. Ideal for similar customers and products. In a centralized manner, the pricing team can ensure consistency in the commercial policy for all customers and product lines.

– Decentralized: each business unit has its own pricing representative to assist in decision making and development of commercial policies. A company with strong independence between its divisions would not be able to unify price decisions in a centralized pricing area. In this situation, pricing should focus on supporting each division and not be concerned with any type of process centralization.

– Hybrid: a centralized pricing team does all the analysis and recommendations, but the final price decision falls on the business unit. It works as support to the business area. Companies with different business units benefit more from this model. Some of the best practices can be adopted by all divisions while specific decisions are made based on the reality of each business unit.

In many of our consulting projects, we create a pricing area for our clients. We can highlight that we have used all 3 models presented above. The secret to making the right choice also takes into account the balance between the cost and return of the area. We always suggest that our clients start the pricing area with planning and that they be self-sustainable. That is, the results of the area must justify its costs.

Due to the potential impact on profitability, we recommend that the entire company develop an independent pricing area with autonomy and authority. The consolidation of the structure that is appropriate for your company’s reality, information, processes, and people capable of taking on this responsibility can bring a good return on your investment.