The CFO’s role has always ranged from guardian of the financial health of an organization to a professional creating value. The world is changing fast. Technological innovation is creating new choices for customers and new opportunities for a wider range of industry entrants. The combination of the ‘push’ of technology, the ‘pull’ of the customer and the threat that comes from new competitors poses questions for company strategies and role of the CFO. The role of CFO involves applying strategic lens capable of differentiating ‘where to play’ strategically, ‘how to play’ commercially and ‘how to win’ competitively.
WHAT’S IN YOUR POCKET?
What’s in your pocket represents basic purpose of a business, that is, “net earnings” – the surplus that comes to an entrepreneur’s pocket. While in short term, “net earnings” may be measured in terms of market share, customer base, year on year growth and so on, in the long term every business exists to generate profits. Thus, the phrase “what’s in your pocket” clearly deals with ‘how to play’ commercially. CFOs have long been confident in their ability to affect the cost side of the margin equation. However, effective implementation of a pricing strategy, is more than simply viewing products on a cost-plus basis. It is also more than tracking pricing performance at the aggregate level. Further, research has shown that pricing has up to four times more impact on profitability than other improvements. A ‘Strategic CFO’ shall effectively implement the pricing strategy in any business entity by taking recourse to the following series of questions:
- Do the decision makers have a clear view of the answers to the questions that need to shape your focus as a CFO – ‘where to play’ strategically, ‘how to play’ commercially and ‘how to win’ competitively?
- What is our short term, medium term and long-term objectives?
- What is our target market, who are our most profitable customers or which is the most profitable source of generating revenue i.e. online sales or retail sales?
- How do we allocate pocket costs in determining price?
- Does our compensation or discount practices help or hinder our pricing strategy?
- What are our transaction patterns, and what do they tell us?
To sum up, product/service pricing is the conscious decision which should be made based on careful analysis of financial data and non-financial factors rather than on ad-hoc basis. Accurate pricing strategies can expand the earnings faster than cost cutting for any business entity.
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Disclaimer: This article is for the purpose of general awareness and does not represent professional opinion of the author.