Sales should not be in charge of pricing. End of post.

Ok...I actually do have more to say than just that. A lot more. Read on to learn who should be in charge of pricing (if not sales). Or read on if you want to hear me roast every department in an organization in turn - your choice.

The BLUF (Bottom Line Up Front)

• A pricing organization is particularly hard to build because it requires two skillsets that don't usually exist in the same person.

• People confuse pricing with revenue management, payments, and FP&A. Don't do that.

• There are bad, mediocre, and fine places to put pricing. You'll probably have to settle for one of the mediocre places until you are very large, so be careful of biases.

One of the things we explain to our clients is that in every project, after all of the research and analysis is done, you will inevitably have approximately ~1.3 million tiny questions about pricing. I say tiny, not because they are unimportant, but because they are low risk. These are issues that, if you were to get them wrong, you would not bankrupt the company. The most common question I get is around International Pricing. But easily second most common is around creating the ideal pricing "org structure". ¹

Why a Pricing Org is so hard to build

Pricing has a few unique problems that make it difficult from a team-building perspective. The first is a lack of expertise. Even amongst ex-management consultants, a background in pricing theory is quite rare. Most of the best ones come from Simon-Kucher, and they already have jobs!

It's also hard to tell the difference between pricing and its cousins: revenue management, payments, and FP&A. Pricing is about understanding willingness-to-pay and designing strategies to capture that willingness-to-pay. The others I mentioned all have to do with money, but use fundamentally different skillsets. At the risk of angering the dreaded FP&A Mafia² , here's a quick rundown of pricing's (less cool) cousins:

• FP&A (financial projection and analysis): building Excel models to predict how much money we're going to have (or not have) later

• Payments: understanding the infrastructure and operations of pricing, including payment rails (e.g. Stripe) and billing infrastructure (e.g. Zuora). Super important and related to pricing but not pricing. Kind of like how being a chef and being a rectal surgeon are related but are NOT THE SAME JOB.

• Revenue Management: maximizing revenue yield when supply is limited. Often the realm of dynamic / algorithmic pricing for airlines, concerts, hotels, taxis, and auctions. Also the realm of economists with Ph.D.'s. This one confuses people because all of these things have prices but are not actually pricing. I get lots of questions about whether I do airline prices - the answer is no, I have no idea how to trick the algorithm and will overpay just like the rest of us!

Bad Places to Put Pricing

We have a lot of answers to this question. Like a lot of pricing questions, there is no one right answer, but there are a few wrong answers. Let's remind ourselves of the two things a great pricing org needs to have:

1. Deep empathy for customer needs, budgets, desired capabilities, shoe sizes ^^ etc.

2. The ability to do math

These two things, unfortunately, don't typically come in the same package. They might both be absent (hello legal), but that's the obvious mistake. The less obvious mistake is when managers put pricing in the hands of either finance or sales, often to disastrous consequences.

Let’s talk through each.

Sales: Salespeople really understand customer needs, often down to extreme detail. They know the individual features their customer wants and can have a better sense for willingness-to-pay than even the most talented pricer. But sales falls prey to 3 blind spots that can wreak havoc on your ability to capture the value you create.

1. Salespeople are myopic, often assuming that anecdote = data. This is especially true in companies with both a self-serve and sales-led GTM motion, where sales' opinion can drown out a thorough and correct data analysis. Especially since the number crunchers are typically quiet and the salespeople are...not.

2. Salespeople close deals, often to the detriment of margin. It's not their fault, sellers' compensation is usually tied to the revenue they bring in. If I knock 10% off of the selling price to close a deal, that might mean my commission goes down by 10% for that deal, but from the company's perspective, we may have just significantly eaten into our margin. If I have 20% profit margins and a seller gives a 10% discount, the seller lost 10% commission, but I lost HALF of my margin.

Finance: finance departments have a great grasp of both the bigger picture and the math underlying it. They often understand the true margin impact of aggressive discounting, and may even have a sense for price elasticity in the market. Unit economics metrics, like conversion rate, LTV, CAC payback, and CRSC^^ should be no stranger to a good financier. Buuuut, they also suffer from some blind spots.

1. Poor understanding of market segmentation. Good pricing enables us to capitalize on market segmentation and charge different customers different amounts for different stuff. Finance may understand segmentation from a behavior standpoint, but they likely do not understand use case differences and feature preferences, which form the core of packaging and bundling decisions.

2. Unable to perform primary research. More than half of good pricing practice comes from getting data that you don't already have. By that, I mean doing customer interviews and customer surveys. If you can't talk to a customer, and convince them to reveal what they want and how much they'd be willing to pay for it, you shouldn't really be setting prices. And no offence finance folks, I just wouldn't trust you to have a normal human level conversation with a customer.

My favorite example of Finance-Gone-Wild³ comes from an organization I worked with a LONG time ago. Below is a somewhat shortened version of a conversation I had with a director of finance at a $75M revenue company that sold software subscriptions.

I've said this before⁴ and I'll say it again: if your financial projections don't have a "customer count" line on them, you're not understanding how pricing works.

Mediocre Places to Put Pricing

Product: This one is touchy because it's actually the most common place we see pricing. Putting pricing in product is fine, but only when product managers are acting like general managers for their product line, i.e. responsible for a P&L. When product managers run component pieces of the overall product, they tend to want to undermonetize features to drive adoption. PMs also tend to build features that are popular, but not necessarily valuable. For what it's worth, product managers often have the best skillset for pricing: heavy customer empathy combined with strong analytical chops.

Marketing: Marketing is theoretically where pricing should be placed (it is, after all, one of the 4 P's of marketing). Marketing departments are great at conducting primary research (surveys and interviews) and understand customer segmentation better than any other department. The problem with marketing departments is often a skillset issue, where the marketer conducting the customer interviews is rarely the same marketer who is building an elasticity model, which is really what you want.

Good Places to Put Pricing

All 3 of these options are great, but they usually are reserved for larger companies.

Product Marketing: PMM often blends the pros and cons of product and marketing into one, taking the best parts of both. When I ran pricing at a growth stage tech company, I was technically a PMM.

Growth: "Growth" means something different at every company, but for our purposes, it's the team that runs experiments, is responsible for key metrics (e.g. churn / conversion) and is often cross functional. For what it's worth, PMM is slightly more common in enterprise sales motions, while growth is slightly more common in SMB / PLG / self-serve motions.

Independent: Reserved for the largest organizations, this is the end goal for most companies. In our experience however, you don't usually need a pricing "department" until you're doing a few hundred million in revenue.

Get in touch

Crescendo works with medium-sized software companies to improve their pricing, packaging, and promotion strategies. If you’d like to book a quick consult, reach out at [email protected] or schedule time via the button below.

1  The 3rd most common is about mustache upkeep

2  You dance on my Adjusted EBITDA, I dance on your grave

3  “Freak in the Excel Sheets”

4  Every day in the mirror