The CFO Pricing Pyramid
Introduction
In this episode of CFO Talk, Steve Rosvold sits down with Anne Warren , Owner of Price Profitability Advisors and an expert pricing strategist. Anne, has built up a wealth of knowledge from an extensive career in accounting and pricing strategy, discusses how CFOs can effectively leverage pricing to enhance profitability. The episode covers two primary types of pricing—new product pricing and day-to-day pricing processes—highlighting the critical role CFOs play in these areas. This conversation is a must-read, watch or listen for any finance professional looking to gain deeper insights into strategic pricing.
Watch or listen to Anne's CFO Talk here: CFO Talk: The CFO Pricing Pyramid with Anne Warren
Anne’s Background
Anne Warren's career trajectory is both impressive and diverse. She began her professional journey with Ernst and Young, subsequently moving into the banking sector with Citi. In 2004, she embarked on a career in pricing with AT&T before taking on the role of Vice President of Pricing Strategy at DIRECTV. Currently, Warren is the founder of Price Profitability Advisors and holds a CPA, with undergraduate credentials in accounting from the University of Illinois, Champaign Urbana.
Understanding Pricing Basics and Its Impact on Profitability
Anne provides a foundational understanding of pricing by categorizing it into two major groups: new product pricing and day-to-day pricing. New product pricing focuses on the initial value proposition, encompassing product design, features, benefits, and financial business case creation. Sophisticated companies often perform a post-launch review to assess the alignment with initial assumptions and market performance.
Day-to-day pricing, which is the primary focus of this episode, involves routine activities such as price list management, foreign exchange (FX) management, discounting, and customer-specific deal pricing.
To help you examine the key variables that drive profitability, including pricing, we have developed the Simple Price, Gross Margin, and Unit Variance Analysis Tool .? It provides a structured and easy way to analyze how these key elements—Price, Gross Margin, and Units Sold—impact earnings. This tool can be especially valuable when evaluating pricing strategies.?
Even small pricing adjustments can have significant impact on a company's overall profitability. Anne illustrates this with an example showing that a 5% price increase can drive more contribution margin compared to achieving a 10% volume increase, which is operationally challenging to sustain.
Understanding market elasticity is key, as it allows CFOs to assess how price changes will influence sales volume. This approach demonstrates that strategic pricing adjustments can be a powerful lever for profitability.
Modern Trends in Pricing Teams
There is a growing trend towards creating dedicated pricing teams.? This trend is even occurring in smaller companies. Private equity firms, in particular, value sophisticated pricing strategies as a lever for driving profitability. While this trend is growing, Warren notes that procurement is still ahead in organizational implementation. There remains a significant opportunity for companies to invest in and develop dedicated pricing teams to enhance their competitive edge.
Internal Organization and Culture
The importance of internal organizational culture in shaping pricing strategies can’t be underestimated. It’s imperative there is a good understanding of who the current pricing decision-makers are, whether within finance, marketing, or sales teams; and how pricing decisions are made.?
"The partnership between pricing, marketing, and finance is absolutely crucial to developing improvement in your pricing strategy." - Anne Warren
Governance, internal controls, and decision-making processes are crucial for enhancing the pricing function within an organization. Data empowerment also plays a significant role, enabling more informed and effective pricing decisions.
The CFO Pricing Pyramid
To assist CFOs in influencing this growing area, Anne introduces the concept of the "CFO Pricing Pyramid".?? It represents the elements CFOs should focus on concerning pricing, including critical areas such as
Warren emphasizes the importance of CFOs leveraging their expertise in these areas to add value and improve profitability. The pyramid serves as a practical guide for CFOs looking to evaluate and enhance their organization's pricing strategies.
The Process Redesign Workbook —a structured resource for systematically reworking accounting and finance related processes – was built to improve workflows, drive efficiency and modernize processes; all critical aspects of the "How and Why" elements of Anne’s pyramid.
Traits for Effective Pricing Teams
Anne suggests that CFOs should contemplate whether to have dedicated pricing resources within their teams. Dedicated pricing professionals need transparency in data and must differentiate between pure price impacts and product mix implications. Financial acumen, effective business communication skills, and the ability to foster internal partnerships are essential traits for a successful pricing team. These elements are crucial for driving strategic pricing initiatives and improving overall profitability.
She emphasizes that pricing teams should possess a mix of financial and soft skills, such as effective communication and business acumen. Team members should be capable of engaging in meaningful conversations with various departments, including sales and marketing, engineering, operations, and legal. Transparency and diplomatic skills are also crucial for delivering tough messages effectively. Warren underscores the importance of hiring individuals from diverse disciplines to enrich the pricing team's capabilities.
Leveraging Finance for Pricing
Finance teams play a crucial role in ensuring data transparency and accuracy. They should be the "single source of truth" for pricing data, ensuring consistent assumptions and thresholds across the organization. Building trust between pricing and finance is essential for effective collaboration. This cooperation enables more streamlined and cohesive pricing strategies, ultimately benefiting the company's financial health.
"This is the area where I feel CFOs can really weigh in and help improve profitability." - Anne Warren
Finance teams can significantly impact pricing by ensuring data clarity and fostering effective collaboration with other departments. Developing standardized financial models that align with finance assumptions can speed up decision-making processes and ensure organizational alignment. This collaboration underscores the critical role that finance teams play in developing and executing effective pricing strategies. By working closely with other departments, finance teams can drive significant improvements in profitability.
Your Finance team can use Financial Forecasting I: Introduction to Forecasting to learn about the foundational elements of forecasting, where pricing is a key driver of revenue and earnings.
Overcoming Data Challenges
A significant hurdle identified by Anne is maintaining a transparent audit trail for pricing data, which involves complex accounting systems and various departments such as sales and procurement. CFOs engaged in pricing strategy should strive for data clarity, tracking everything from the list price to the pocket price. Addressing these data challenges ensures a more accurate and reliable basis for strategic pricing decisions. This transparency helps in creating robust, data-driven pricing strategies. Making sure the data is presented in the language of their audience is also important.
"It's not so much that they don't think about they think about it, but it's the way in which the data gets Presented. Sometimes, if you're trying to have a conversation, let's say, with your CMO or even your CEO, And you're throwing a great big spreadsheet at them with all this information, which as a finance person, we're we are fond of doing." - Anne Warren
The Role of CFOs in Pricing Strategy
Here are some practical recommendations for CFOs to engage in pricing strategy. CFOs should use their expertise in data management, sampling and governance to identify gaps and inconsistencies in pricing data. Implement annual price reviews to help maintain pricing discipline and sustainably improve profitability. CFOs should also work on building partnerships and fostering collaboration within the organization to ensure effective pricing strategies.
Ann explains how CFOs can support pricing teams through customer segmentation, moving from a cost-plus to a value-based pricing model. Effective customer segmentation allows for targeted value propositions, enhancing overall pricing strategies. This approach enables companies to better understand and cater to different customer segments, ultimately driving more profitable pricing decisions. CFOs can also support this transition by providing the necessary funding and resources.
Conclusion
This CFO Talk underscores the pivotal role CFOs can play in their company's pricing strategies. From understanding the basics of pricing to tackling complex challenges like data transparency and fostering team collaboration, CFOs are well-positioned to make a significant impact. By embracing the CFO Pricing Pyramid and fostering partnerships within the organization, CFOs can drive substantial improvements in profitability and efficiency. This episode serves as a valuable resource for finance leaders looking to enhance their strategic approach to pricing.
Here is another great resources on the CFO and Pricing:
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CFO & Controller
2 周All well and good, but the biggest issue is getting Sales to learn how to sell to the customer when the price needs to increase due to raw material price increases, or because they have been giving away the farm for years because it's easy. Fancy CFO projections are not going change a sales department culture of not wanting to confront customers with price increases. This is where the art is - please follow with discussions on this issue!
I like the reminder on building partnerships across departments, which as finance pros we're often so siloed into our own roles/ objectives. Good read!
Senior Manager - Business Finance | Deal Pricing, Budgeting, Profitability, Program Management,
3 周Very insightful
"Insightful episode for CFOs and finance leaders! Anne Warren’s breakdown of pricing strategy essentials—covering both new product pricing and day-to-day processes—underscores the powerful role that pricing plays in profitability. Her 'CFO Pricing Pyramid' framework is especially valuable, showing how structured processes, reliable data, and cross-departmental collaboration can drive effective pricing. This episode is a must for anyone looking to optimize their finance function’s impact on pricing strategy."
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4 周Nice article