CFOs are increasingly are playing a larger role in the management of pricing decisions and profitability at many growth and middle market companies. CEOs and owners of these companies view pricing trends as a primary competitive challenge. Historically CFO focus has predominantly been on the administrative side of pricing – tracking and reporting, managing exceptions and enforcing policies. But within some industries, especially Manufacturing, Retail/Wholesale and Services, finance is playing a more strategic role around aligning pricing with corporate strategies, driving pricing approaches and getting value out of customer-specific investments.
Partly as a result of our slow-growth economy, growing sales volume is becoming increasingly challenging. As a result, leading growth and middle market companies have been actively managing their cost structures and operations efficiencies and the pricing component of revenue generation. A recent survey of a sample of publicly-traded companies found that 65% of CFOs report having raised prices (82% in Manufacturing, 90% in Retail/Wholesale), and 42% say more price increases are coming. About one-third of the companies that have not raised prices say they will likely do so. More than 40% of CFOs from the Technology, Energy/Resources and Financial Services sectors have not raised prices and have no plans to do so.
The Pricing Opportunity for Finance
Increasingly, many CFOs are seeing pricing and profitability as an important area where their finance teams can bring more value to their organizations, especially when working with business units. CFOs are situated at many companies to provide insights into pricing and profitability strategies since finance owns much of the data for such programs. CFOs who focus on increasing their business partnering role understand that pricing and profitability are areas where CFOs can add significant value to the company. Successful CFOs in this area typically have strong analytical abilities and understand that developing pricing programs that help drive profitability requires a solid understanding of, and connection with, overall corporate strategy.
Challenges Facing CFOs Who Want a Larger Role in Pricing and Profitability
Carving out an active role for CFOs in pricing and profitability decisions can be a harder task at some companies than others. CFOs who demonstrate ROI and value-focus within their companies will be better at getting the business units to engage their finance function in pricing decisions. To build those partnerships with the business units requires the CFO knowing what value drivers in each unit and a demonstrated desire to help take the unit to a higher profitability level. These traits will result in CFOs gaining the confidence from the business units who will endorse a more analytical approach to pricing.
In addition to building partnerships with business units, CFOs face the challenge involving having the right talent, disciplines and measuring capabilities to generate deep analytics necessary for analyzing pricing trends data by geography, customer profile, product line and other dimensions. CFOs who do not have the internal foundation to provide the necessary data need to determine the opportunity costs to their companies from this lack of depth and determine what steps are necessary to gain the necessary information. In many cases it makes sense for the CFOs to engage outside expertise to assist in pricing matters.
Another critical skill CFOs should bring to their companies is pricing and profitability guidelines their companies can use to manage decisions looking forward, rather than only backward-facing analysis. Using historical data analysis to improve pricing decisions going forward is an area CFOs can add significant value to their organizations.
How Companies Are Using Profitability Analyses to Drive Decisions
A recent survey found that 60% of companies base pricing decisions on product/service-level profitability analysis. That percentage is higher among the Manufacturing (78%) and Services (73%) sectors. Customer-level profitability analysis influences pricing decisions for 46% of companies and more so for the Manufacturing and Services sectors. About 40% of companies use consolidated/business-level profitability analyses to inform their pricing decisions; more than half of the companies from the Services sector use this type of analysis.
Having well-disciplined pricing processes provides a competitive edge to growth and middle market companies. Companies that do not have sound pricing practices may be experiencing significant opportunity costs resulting from loss sales volume, margin and/or both. CFOs of growth and middle market companies need to be a key partner within their companies to create and manage competitive pricing practices. We help your company in your CFO search and with CFO consulting. Harvest CFOs understand the importance of building such partnerships within companies.
