Who owns the pricing response to deep discounters?

Introduction

As often is the case when playing with AI, its value to me is the thinking it stimulates instead of a precise answer to my question. I had planned this post to be on another example of providing simulation data to an AI (LLM) engine, following up from similar thinking in a different context.

However, when I got the response to my initial question, it led to a follow-up question, which led me to this article, triggered by my real-life experiences in business with pricing. The question is, who does and should own the pricing response to a competitor who is using heavy discounts to gain market share?

Corporate Complexities

Let's start by addressing the elephant in the room. Pricing is off a cross-functional cluster. The product group owns list pricing and sales, and the sales finance department owns discounting and net pricing. There may be a few check-ins in the process like the product having to pretend to agree to a discount that exceeds pretend rules, but in general, this dichotomy is not unusual.

When faced with a competitor doing heavy discounting, especially gaining market share, periodic business reviews typically involve the leadership team hammering on the product team to do something. We are losing share, and Wall Street wants to know why our products are not competitive anymore!!

When product management, or a Business Unit leader, is set up as a "General Manager," there is some logic to this hammering. However, as one product management leader once told me about his job, "It sometimes feels like I am driving one of those toy plastic cars with stickers for gauges and no real levers to pull".

You could argue that these obstacles are easily overcome because most humans are natural collaborators, right? Ok, maybe not, but most people in leadership positions are, right? Ok, at least people in different functions don't have other incentives, right? Uncle! Perhaps these obstacles are not easily overcome.

Asking multiple LLMs to analyze a simulation

So, I wrote some pricing game simulations, which, at its core, use the famous Prisoner's Dilemma approach. I will be writing and using other cores in the future. Then, I asked three different models to analyze the output (Grok2, Mistal-small, and Antropic 3.7), with a fourth model (Gemini 2.0 flash) as the election decider and final analyzer. This approach to analysis is based on the "Majority rules" function I have started playing with.

I initially asked Majority Rules to assess each pricing strategy, which stimulated me to ask what was the best response to the "Always Discount" strategy.

I received the following output (Note: this is not a recommendation; I am still refining the process, and with pricing, there should always be a human in the loop - this is a tool only):

always_maintain:?This strategy performs poorly, resulting in a very low market share and profit compared to 'always_discount', making it an unfavorable choice.

tit_for_tat:?This strategy achieves a balanced market share split with 'always_discount', but results in a lower profit than 'always_discount'.

grudger:?Similar to tit-for-tat, 'grudger' secures an equal market share but with slightly less profit compared to'always_discount'.

adaptive:?This strategy also maintains market share, with profits close to grudger and tit-for-tat, but slightly lower than 'always_discount'.

random:?This strategy performs erratically, resulting in the biggest profit, however does not seem to be a reasonable strategy.

Best Strategy: The 'tit_for_tat' and 'grudger' strategies are strong responses to 'always_discount', as they prevent the 'always_discount' strategy from dominating the market, ensuring market share and a reasonable profit.

Implementing Any Pricing Strategy

Okay, after more modeling (which function would do this in a real company, and who would accept it?) and more discussion among company experts, some rough consensus emerged about responding with tit-for-tat. Who would implement it? Could sales get out of a win-by-win? This salesperson is complaining the loudest about actually implementing an overall pricing strategy. Does the product group have control over pricing strategy? Will the corporate leadership devote cycles to overseeing this? Does anyone in the company believe in a pricing strategy? Is quarter end approaching - is it a few months away? Is there corporate clarity about which is more important, market share or profit? What do the IT processes support and automatically implement?

To say that pricing strategy is complex is an understatement, to say the least.

Conclusion

In any company, the competitiveness of a product/offering is often viewed as a product group problem. The reality is that the pricing strategy also has a significant impact on profit and market share outcomes. How corporate leadership tackles these joint issues, can determine the outcomes for the overall company or business unit.

I will continue to refine pricing simulations and analysis of those simulations using LLMs and other tools. Not so much because I believe they will give me the precise answer (I've seen plenty of people and functions be 'precisely" wrong). I will do so because of the questions they stimulate in me. While implementation requires someone to put a stake in the ground, good questions are often more valuable than presumed good answers.

As for who should own pricing strategy, list, discount, and overall responses, I lean towards Sales & Marketing, where Marketing is part of the Sales group. It is an delusion in many companies to believe the product group determines any other outcome than what a product can do. I lean towards not indulging in that delusion and focusing on outcomes.