Pricing Governance: Unglamorous Excellence
What differentiates robust, sustainable price performance from its flaky, short-lived alternatives? A big part of the answer isn’t terribly flashy: governance.
Before you run and hide, let me point out that, years ago, my first reaction to governance was to do just that. But reflecting on my experience as 3M’s Chief Pricing Officer, I am more confident than ever that good governance is a core enabler of any organization’s long-term price performance. In fact, I believe that governance should be the centerpiece of any pricing program and is critical to gain sustainable results.
Admittedly, governance occupies the lowest rung of the “cool” ladder, along with pocket protectors, Chevy Nova’s, and mixing plaid and stripes. Governance doesn’t get invited to parties or admired for its contributions to society. Even hipsters stay away.
However, I think governance’s reputation for bureaucracy and buzz-kill exists because most governance we encounter is bad governance, and bad governance truly deserves to be ostracized. Bad governance leads to frustration and power struggles, while reducing stakeholders’ confidence in and commitment to the processes and policies that are in place. Arguably, no governance (where short-term, sporadic gains can take place) might be better than bad governance.
Good governance, on the other hand, can be revolutionary. Good governance has its priorities straight. It knows what to pursue and what to leave alone. It speaks clearly, intelligently, and with authority, while staying light and agile. It is engaging, keeping people focused on priorities and driving healthy behaviors. In short, good governance helps to boost the predictability and profitability of any pricing program.
In pricing terms, good governance has the following, interdependent characteristics:
Leadership engagement and support
Strategically aligned and carefully selected objectives (the critical few)
Well-defined and clearly communicated policies and metrics
Periodic, consistent performance monitoring and reporting
High stakeholder engagement and support
Actionable guidelines for adjusting the governance model over time
Capable supporting infrastructure (tools, resources, skills)
Let’s take a look at each of these factors in a bit more detail.
Ultimately, leadership endorsement and advocacy will set the effective limits of governance. Leaders must understand how the specific policies, procedures, and metrics enable business strategy and profit performance, and must willingly and enthusiastically promote accountability. Above all, leaders must walk the walk, avoiding the urge to waive or sidestep governance protocols on a whim.
For leaders to stomach this level of championship, governance must be very carefully deployed. Governance should be implemented with a fervent commitment to nimble protocols and wholly devoted to advancing core business objectives. In other words, those business objectives must shape how pricing governance is implemented. The policies, procedures, and roles of various stakeholders in the organization should be strategically aligned to the central business strategy.
With the conceptual framework for a governance model established, managers must develop the operational components of governance. This includes policies, processes, and metrics. Policies should outline the specific rules and criteria for making pricing decisions, along with the underlying rationale. Processes should be developed to ensure accountability to policies. Metrics should be selected based on their ability to properly and fully represent price performance relative to the key objectives. Once again, policies and processes should be light, agile, and kept to the minimum required to ensure quality outputs. Metrics should likewise be prioritized carefully. Select enough to portray a rounded, balanced picture of performance, but avoid introducing unnecessary noise, confusion, or distractions.
Armed with metrics, the organization must begin to hold itself accountable. This includes routine reporting of price performance to key stakeholders, often as part of a monthly leadership meeting or some other similar venue. Take advantage of existing structures and rhythms, but be intentional. Governance must not be an afterthought. More important than the reporting is the subsequent action planning focused on emphasizing positive trends or mitigating negative ones. This action planning should be a team effort, with participation and support from senior leadership, as well as marketing, finance, and sales roles.
If these first few pieces are properly thought out and communicated, organizations should expect to see strong stakeholder engagement. Employees should be comfortable with the rationale and execution of governance as a program and its various aspects. Although naysayers will need to be managed, the primary objective around engagement is not to enforce token compliance, but to truly gauge comprehension of and commitment to the policies and processes in place. Where concerns exist, it is vital to fully understand the underlying motivations and fine-tune the program as appropriate.
One of the hallmark characteristics of good governance is its flexibility. Over time, priorities will shift, market conditions will change, or it may become apparent that the current polices and procedures simply aren’t meeting expectations. Governance needs to be intentionally agile enough to respond to these circumstances. Note that this isn’t license to make changes frequently or haphazardly. Governance should drive performance, not vice versa. Nor does this flexibility excuse poor up-front planning. Rather, a good governance model should identify specific timing or performance triggers that initiate a deliberate and intentional calibration or adjustment of the governance model as a whole.
Although infrastructure is not a component of governance per se, it is crucial to effective governance. Infrastructure includes the people, tools, and capabilities required to effectively craft, implement, and execute the tactics and actions required to keep performance levels where they need to be. Without a solid infrastructure, governance has no dependable way to effect change.
If your organization is thinking about implementing or reinvigorating pricing governance, here are a few actions to consider taking:
Engage senior leadership to understand their expectations around price performance and accountability, and obtain their commitment to an aligned governance model.
Determine which metrics would best explain price performance in terms of the company objectives, and identify necessary counter-balance metrics to manage trends to the extreme.
Document current policies and procedures (or update existing documentation). Start to identify improvement opportunities, and unnecessary rules or process steps.
Understand the perspectives and opinions of key stakeholders, aiming to understand their views on how well the current process is working, who should own pricing decisions, and how price performance should be measured.
Evaluate your current reporting rhythm. Is it frequent enough? Is the right audience involved? Is there an emphasis on considering and selecting appropriate response actions?
As you work through these topics, you will likely gain some solid insights into how to best improve your existing governance models, or how to most effectively deploy new ones.
Good governance may never be the heart and soul of the party, but it will make sure the right people come, the food is good, the bar is stocked, and that nothing gets too out of hand.