Complete Information

It is self-evident that given the equation :

a + b = c

If a, b, and c are all known, then there is no mystery about any variable in the equation - there is no uncertainty.

Regarding our subject, this can be likened to a product market where all products are equivalent in capabilities and all products are priced the same - there is no significant uncertainty about how a company should price its product.

The reader might say that a company could price its product higher than others. What is the probability of a company with a product with the same capabilities as competitors pricing higher than others? Not likely, because the company would be unlikely to sell any of its product. The reader might still say the company could set prices lower than its competitors. How probable is this? This would necessitate all players lowering their prices and destroying the overall profits of the market/industry.

A market where there is complete pricing information to everyone in a market and every function within a company can be compared to a Nash equilibrium, where no player is better off by raising or lowering its prices. This is not a very interesting case to study price decision-making, as any function in a company can own pricing decisions, and any function in the company will likely come to the same pricing decisions.

Incomplete Information

Games without complete information can be analyzed using many frameworks, including Bayesian games and solutions such as Bayesian Nash Equilibrium (BNE).

In the context of pricing, we have to consider many probabilities. Let's choose the Product function in a company as one example :

• Do they have sufficient information about pricing in their market
• If they need to rely on salespeople for that information, what is the probability they will get the information from salespeople in sufficient quantity and accuracy?
• What is the probability that noise is introduced through the incentives of the sales compensation plan?
• What is the probability that any single product person, or even the entire team, will have a meaningful influence over the sales compensation plan?
• Do the product people control list AND net pricing (discounting) or just list price, and therefore, how meaningful are their pricing decisions if they only control list pricing?
• What is the probability that the sales compensation tools will support the pricing strategies that a product team wants to pursue?
• What is the probability that a product team will be able to influence the IT team to implement changes that support the pricing strategy the product team wants (quoting, escalation automation, etc)?
• How much influence does the finance person assigned to the sales function have over pricing decisions, and what criteria does the finance team use / is there a corporate gross margin mandate, or is there a corporate operating margin mandate?
• What is the probability of the product team being sufficiently interested in the nuances of pricing vs the nuances of technology / the product?

The probability of any one variable not being favorable to the product team setting pricing is one question. The likelihood of all variables is another completely different, complex, and lower probability question.

The same exercise could be done for the Finance function, the Sales function, the Support function, the Strategy function, the CEO leadership team, and any other function, and with the probability of all things, not just one thing, is considered.

I believe in many markets of incomplete information, especially where there are long sales cycles and protracted negotiations with customers, the Sales team is going to be the best place (and the default place regardless) for pricing decisions to be made, because they are going to check the box on more of the questions above than any other function; importantly, the probability across all the questions is most likely to lead to Sales being the optimum place.

In business, and perhaps in life, there are few things worse than responsibility for something you have no meaningful control over. To enforce a delusion of control on someone is cruel and unusual punishment. The reader may say, yeah, but I know a person who was an incredible communicator, a great relationship person, and they could influence others in amazing ways. Ok, but what is the probability of such a person a) existing in any function and b) being the person responsible for pricing decisions? We can all think of exceptions to the rule.

Conclusions

In business, there exist functions that are so politically powerful, for whatever reason, that they get an overweighted voice in what happens - that is the real world, and that cannot be denied. There are also situations where one or more functions do not trust another function to "do the right thing," so they give responsibility to someone who will control that team - often a delusion that just sets up political conflict that is ultimately resolved in all the ways we know politics is resolved.

However, when I look at the question of who should own responsibility, I look at the probabilities of many different variables, not just individually, but the likelihood of many of them together.

In terms of what is optimal, there is more to a decision than a gut feeling, what feels fair, or even intuition about who will make the best decisions. A function requires the information needed to make good decisions, a clear mandate to make those decisions, and an the ability to implement those decisions effectively.

In many growth scenarios with significant incomplete information, the best function to own pricing will often be sales, in my opinion.

The Finance team may control pricing decisions for mature companies with activist investors, an operating margin stability mandate, and similar conditions.

Are there situations where the Product team should own pricing? Sure, but most product teams have their hands full just getting the product right and being "disruptive." - this gets to the heart of another issue: many companies have new product introduction (NPI) processes backed by product team-provided business plans that no one believes. Why does no one believe them? Why humans do or do not believe other humans is a complex issue, but I am going to assert that the main reason is there are so many variables the product team does not control, and the more products a company has, the less control any given product person has.

How about Marketing? Should Marketing own pricing? There are some examples where marketing has owned pricing and been innovative. However, in the interesting cases of incomplete information, I would have a propensity to believe that Marketing should be part of sales, but that is a discussion for another day. Marketing as a separate organization may make sense in markets approaching complete information.

While different companies have different internal complexities, politics, and more, the question for me is who, in the interesting pricing cases, has the necessary information and the least barriers to executing a pricing strategy. In many cases, that will be the sales team. What if they get the strategy wrong? Well, there is a probability of any function getting the strategy wrong.

When I am considering complex issues, I like to create models with criteria and weights. Models are not determinitive, but they may help you think through what is important. For example a model like this :

Weightymatters - Who Should Own Pricing

If you were making the decision about where to put the pricing function, what criteria would you use, and what weight would you give to each criteria?Link