The Role of the CFO in Pricing
CFOs should be ideal people to drive pricing, but they usually aren’t.
They are awesome because they care about margin. They build forward looking revenue and profit models. They have resources to calculate every KPI imaginable. And most importantly, they have a ton of influence in the company. This sounds like the ideal person to influence – if not own – pricing.
However, my experience indicates their single biggest problem when it comes to pricing is they don’t understand value. Most CFOs come from accounting. And most accountants think pricing requires knowing the costs and adding a margin. Ouch. This can work sometimes, but it almost always leaves money on the table.
The most profitable pricing decision by far is to adopt value-based pricing (i.e. charge what a buyer is willing to pay.) By the way, value-based pricing is impossible to perfect. After all, you can’t read a buyer’s mind. But it’s an attitude, a vision.
A CFO doesn’t need to know the value of the products their company sells, but they should make sure pricing and other parts of the company use value to drive business decisions. Besides setting a price, knowing how a customer values its products helps the company create products with more value, communicate the value, and capture more of the value delivered.
In my mind, the real power of CFOs is in the questions they ask when they release funding for projects. Once CFOs understand what value is, they can query every relevant department on whether or not they understand value before making their business decisions. Here are a sampling of questions I would ask as a CFO: What is the biggest market problem the product solves?
- How else can customers solve it?
- Who are the competitors, if any?
- How is our product different from the alternatives?
- Which market segments value this the most?
- If we weren’t in the market, what would those market segments do?
- For B2B, how much money will our differentiation make or save customers?
As you look through this list of questions, I never asked about price. In fact, these questions look like business related questions. But the answers to every one of these questions should be based on how customers perceive value.
When you analyze the sales price using CFO.University’s Simple Price, Gross Margin and Unit Variance Analysis are you using the “value” concept or “cost plus” to determine the sales price? Help your team find the value of your products when setting prices.
In fact, value should drive almost every business decision!
Yet, who in your company really knows the value of your products? I can almost guarantee you the answer is nobody.
The CFO doesn’t know the value of the products, but he or she is in a unique position to make sure other people do. CFOs hold the purse strings. They are concerned with margins. They have influence. They care!
If you’re a CFO and want to know more about value, reach out to me. I’m happy to help. Mark Striving
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