The CFO’s Role in Pricing
Pricing is one of the most important aspects of any business. Companies need to generate sufficient revenues and profits, without alienating key target customers. It can be difficult to find the right balance between charging too much and not charging enough.
Traditionally, pricing decisions across many businesses were independently made by the sales and marketing teams. However, an increasing number of modern-day shareholders, investors and CEOs feel that CFOs should provide more input into pricing to help deliver their company’s financial targets.
To ensure that prices are set correctly, businesses need support from different members of the team. The role of the CFO is becoming increasingly important in this process, as they can provide accurate financial data, valuable insights, and support to those responsible for pricing decisions.
7 ways CFOs support pricing
CFOs should play a major role in supporting pricing. Their unique combination of financial expertise, commercial awareness and knowledge of the performance data provides valuable insights to help maximize revenues and profits.
Here are seven ways in which CFOs can support pricing:
- Pricing strategies
- Revenues and profits
- Intrinsic value
- Contract reviews
- Incentive discounts
- Growth initiatives
CFOs should participate in a Pricing Committee alongside other key stakeholders such as product, finance, sales and marketing to identify optimal pricing strategies. This includes understanding the different ways you can price your product or service and choosing the option that will generate the most revenue and profits based upon the value provided to your customers. It also involves studying your competition to see how they price their products and services, and checking that your prices are in line with the market in circumstances where this is deemed to be the most optimal pricing strategy.
Revenues and profits
CFOs can support pricing by helping to quantify likely revenue figures and profit margins for different pricing levels. This means calculating your likely volume of sales at each given price point and how much profit you will make for each unit sold. Once you know your margin, you can work with other members of the executive team to help set prices that are both competitive and profitable, whilst recognizing the value that your company is providing to the customer.
CFOs should work with other functions to determine the intrinsic value of your products and services to the customer. This involves collecting and analysing customer data to understand what benefits the customer receives from using your product or service and how much those benefits are worth to them. By identifying and quantifying the value, you can help set a price that accurately reflects what the customer should be willing to pay.
By creating a standard customer contract template, companies can determine whether customers are being treated in the same way and that pricing is applied fairly, or whether there are opportunities to price the customer rather than the product. CFOs should carefully review the terms and agreements of these contracts to check that the pricing and obligations to the customer represent the value provided to them and generate the desired profit margins to your company.
Likewise, CFOs should review any new and existing bespoke contracts for key customers to assess their underlying profitability, obligations and risk factors. This includes ensuring that any special arrangements or discounts granted to these customers are justified.
Another way that CFOs can support pricing is by working with your marketing team to help set policies and approval processes for customer discounts. This means deciding how much of a discount you are willing to offer certain customers for various reasons, such as volume purchase or early payment. Setting clear guidelines for discounts helps ensure that your prices remain competitive while still allowing your company to generate your desired profits.
CFOs should participate in negotiations with some of your most important clients to reach an agreement on pricing levels and the overall services offered. It is important to remember that not all customers are created equally, and that you may need to offer varying prices to different clients based on their importance to your business. By being flexible and willing to negotiate, you can help ensure that you are getting the best possible price for your product or service.
By scrutinizing growth incentives such as bundled services, product add-ons and free gifts, CFOs can make sure that any extra revenue generated from these incentives is not at the expense of the company’s bottom line. This involves a detailed review of the cost of goods offered within such incentives and the company’s ability to deliver these to the end user.
These are just a few of the many ways that CFOs can support pricing. By working with the executive team and being involved in pricing decisions, CFOs can check that prices are set at the appropriate level to help the company generate a healthy profit.
If this article has helped you, please consider sharing it with your network. We also hope to see you in our community! You can sign up as a free member here.
To maximize your impact as a modern-day CFO further, join a group of your peers in the CFO Programme.