Who Is Responsible for Increasing Pricing Power?
Companies are under immense pressure these days. Business are folding left and right, and many owners believe that cutting their prices is the only way to survive.
This month our question is focused upon a more pleasant alternative: increasing one's pricing power.
Pricing Question from a Reader
When presenting the DUMB framework, you described the four inputs to pricing power. It's unclear to me, however, which organizational entities should take primary responsibility for each input. Could you shed a bit of light on the matter?
A quick review of the DUMB model
As you point out, I did not provide guidance as to which staff members or departments would be best suited to take action as a result of its use. This oversight represents a clear opportunity for enhancement of DUMB.
First, let's perform a quick refresher on the four inputs of my pricing power model:
- Buyer urgency
- Barriers to purchase
Responsibility for the first three should be fairly easy to determine for most firms:
- Discoverability: Sales and marketing
- Buyer urgency: Sales and marketing
- Mesmerization: Product management and engineering
While other groups may be brought in from time to time, each input has exactly two closely-aligned parties that share responsibility.
The fourth input, barriers to purchase, is far more nuanced.
What is a barrier to purchase?
In short, a barrier to purchase is anything that causes buyers to lessen their willingness or ability to pay for an item. In some cases, this barrier is a mere speed bump that slows the buying process. In others it may force vendors to accept price concessions. In extreme cases it may dissuade buyers from making a purchase entirely.
Let's take a look at a few examples of barriers to purchase, and assign primary responsibility within a vendor's organization:
- A long line to check out - Operations management
- An insufficient warranty - Marketing
- A lack of financing opportunities - Financial management
- A confusing online checkout process - Product management
- A long lead time prior to delivery - Supply chain management
With a bit of thought, I'm sure you could come up with many other barriers, and many other departments that might need to become involved to address them.
The principal-agent problem
Whenever there is a need for multiple parties to work together, it becomes vital to ensure that their incentives are closely aligned, not just was each other but with the company as a whole. When this alignment is missing, organizations have little hope in growing their pricing power.
At one time everyone knew that as a company prospered, so too would its employees. However, due to decreasing employee tenures and the introduction of metrics programs, staff members have little reason to invest their time and attention to improve the long-term pricing power of their employers. In fact, many workers are strongly incentivized to ignore such concerns entirely.
Why would a temporary minimum-wage stock-boy care about helping a shopper locate a product when he is evaluated solely on the speed at which he places items on a shelf? For that matter, why would a software engineer care about the maintainability of his code, when he would be unlikely to maintain it?
This lack of alignment between the long-term goals of a company and its workers represents something of an unusual twist on the principal-agent problem. While the concept normally focuses upon workers who ignore the desires of their employers and choose to work toward their own ends, something very different is occurring here. In this case, employees are pushed to work against their employers' interests by the companies themselves. This is squarely the result of an over-optimization of departmental efficiency at the expense of the long-term pricing power of the firm as a whole.
As an outsider, it should be clear that it would make little sense for workers to take on additional duties to boost the firm's long-term pricing power when such efforts, in the best case, would fail to improve the metrics upon which the workers are judged. This is doubly true when any benefit that could be recognized by the company would likely be a lagging indicator of performance.
This misalignment of incentives represents an undesirable opportunity for problems to fall between the cracks and erode a firm's profitability. Even if staff members recognize the issue, addressing it would require agreements across departments by individuals who are incentivized to ignore them.
So is it a lost cause?
It seems that most managers, if they recognize the problem at all, attempt to patch over the issue by introducing roles like customer advocate, success manager, and concierge. I would argue that this is far from an ideal solution. A person tasked with helping customers one at a time will likely find himself with limited authority to implement change and will likely find himself hard-pressed to minimize the damage that his employer's incentive structure continues to cause.
Fortunately, there is already a role that is well suited to removing barriers to purchase. Ironically, it's a role that is becoming increasingly rare over time. I'm referring, of course, to that of the company owner. He is a person whose incentives match the long-term health of the company as a whole. The continued push toward conglomeration, equity dilution, and the need to delegate responsibilities makes it difficult, however, for this person to effectively reduce barriers to purchase on a routine basis.
This dispersion of responsibility for pricing power to large numbers of staffers who have little interest in the matter provides an opportunity ripe for exploitation by smaller competitors.
While larger firms enjoy distinct advantages when it comes to discoverability, urgency, and mesmerization due to their longer reach and deeper pockets, small companies tend to possess a distinct advantage when addressing barriers to purchase.
As they grow, many companies would do well to create a role: a chief revenue officer who owns the entirety of the buyer's journey. The odds of this position being created with sufficient authority at established firms is quite low. Its introduction would require a radical reengineering of organizational structures that could prove fatal to some businesses. Nevertheless, its adoption by small agile firms would likely provide them with significant advantages when it comes to maximizing their pricing power.
Even those firms that are unable, or unwilling, to adopt such a position would likely find immense value in fully documenting barriers to purchase. Firms that are able to record the stages in which barriers arise, become revealed, or go unanswered would undoubtedly be able to identify at least a handful of problems that would be straightforward to address no matter the degree to which their incentive structures have become fractured.
Small companies often believe that larger competitors possess all of the advantages when it comes to pricing power. As a result, they are far too willing to cut their prices at the first hint of competition.
As described in this examination of the DUMB model, small companies do have a significant advantage that most large firms will find difficult to emulate. Rather than spending significant resources building better products or buying advertising in larger and larger quantities, small firms may find that the biggest bang for their buck is as simple as streamlining their customers' buying process.
Questions come from readers like you. If you'd like your questions answered, send them my way.
Pricing in the News
- Hurt by the pandemic, a small town in California will pay tourists to visit
- The cinemas now hiring out their screens to gamers
- Kroger to close more stores instead of giving workers hazard pay
- Apple cracks down on apps with 'irrationally high prices' as App Store scams are exposed
- Tesla charging cost magnified as Texas electricity auction system fuels price spike
- How the FTC Protected the Market Power of Pharmacy Benefit Managers
- Epic will pay off class-action loot-box settlement with in-game currency
- Frontier raises sneaky "Internet Infrastructure Surcharge" from $4 to $7
- Texas woman whose electric bill soared over $9,000 files class-action lawsuit seeking $1 billion from Griddy
- Companies Are Successfully Raising Prices, But the Fed's Outlook on Inflation Is Unchanged
From the Blog Archives
- Low Prices Can Be Anti-Consumer - Will your customers demand to pay higher prices?
Notable Pricing Quote
"Money can't buy love, but it improves your bargaining position." -- Christopher Marlowe
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