A bold assumption: “Our local experts know the market and the customer best”

For many entrepreneurs, it may sound quite provocative when I ask the question of whether the future of pricing lies in centralization. After all, it is common practice in many companies to grant sales offices, branches or subsidiaries a high or even very high degree of autonomy in pricing. After all, it is the local experts who can best assess the customer, the local market and the competition. Whether a largely decentralized pricing is without alternative, we will check today.

What speaks for decentralized pricing?

First of all, there is no doubt that local market knowledge is always better than in a more or less distant corporate headquarters, at least in terms of specific details. Whether the branch just before the border to one of our European neighbors, however, has the entire market events completely unselfishly in view, is on another sheet.

What hopefully works well, however, is the merging of regional findings into a meaningful overall picture. By the way, how to involve the field service in a methodically reliable way in price research, will occupy us in one of the following newsletters.

Decentralized pricing at McDonalds

One of my seminar participants was responsible as an entrepreneur and franchisee for several McDonald’s branches. He gave us an insight into the decentralized scope of action of the local entrepreneurs. Ultimately, the price sovereignty lies completely with the franchisee – within the framework of their own calculation. Something that is not so well known to the public. The Big Mac does not cost the same in all districts of Berlin. A quick adaptation to changing customer wishes and to different target groups in the restaurant at different times of the day are thus special challenges for each franchisee. Interestingly, all international transaction data is then evaluated centrally in the US McDonald’s headquarters.

Decentralized pricing in international corporations: the private car purchase

Do you still remember the last purchase of your new car? What almost belongs to the ritual is the question of the individual discount on the list price. Proudly one can announce at the regulars’ table that one has managed to negotiate a 13% discount on the list price. The price sovereignty lies here with the decentralized car dealer on site, who also has the option to propose more or less attractive conditions for the trade-in of the old vehicle.

However, this is not to say that pricing in the automotive industry is completely decentralized. Rather, there is, for example, in the VW Group the function of strategic group pricing, which very strictly ensures that the price differences between the comparable models of Skoda, VW, Audi and Porsche are also maintained.

Centrally controlled “decentralized pricing”: the market for vans and transporters

As part of one of our pricing projects, we also had to deal with the pricing systems for transporters, as offered by Volkswagen, Mercedes and almost all other major manufacturers and used by delivery services, but also by craftsmen. Here we were able to get to know the interaction of the centrally controlled, sometimes very short-term actionist conditions with the efforts of the decentralized sales organizations to conclude sales to achieve quarterly targets. The complexity threatened the efficiency of pricing to a considerable extent.

Where are the dangers of a largely decentralized pricing?

There are empirical studies that the efficiency of pricing is less pronounced in B2B business when sales are granted a high degree of autonomy. This is not surprising, as in most organizations, the sales team is managed via sales and market share targets.

Furthermore, a sales employee will always rather overestimate the risk of losing a customer due to the price, especially since he is well aware of the high effort for a new customer acquisition. Thus, the incentive in many sales organizations is rather limited to put the enforcement of higher prices or the consistent adherence to the pricing strategy in the first place. Defense of sales and market shares via a moderate pricing is a quite rational strategy.

Centralization of pricing: the tasks of product management

In various pricing projects, we have redefined the division of labor between (product) marketing or product management and sales: product management is responsible for the strategic orientation of pricing and positioning for the product program. This should always be associated with statements about the value drivers of the products and the core statements of a Customer Benefit Argumentation. The respective requirements of the markets and market segments must be bundled and prioritized, because as a rule not every niche and every customer can be served.

Centralization of Pricing: Discount structures and discount guidelines

Furthermore, in these projects, product management was assigned the task of creating binding strategic guidelines for the (international) discount structures. This also includes an answer to the question of which customer groups, sales partners or industries the sales department can perceive which discount margins (which it does not necessarily have to exhaust).

Centralization of Pricing: Big Deal Pricing

One of the most important occasions why the debate about central vs. decentralized pricing is being conducted at all are international customers who either demand a uniform selling price for all their subsidiaries in the different countries, or who simply want to transfer the lowest price of a country to the entire region (e.g. Europe) with corresponding negotiating power.

Here, the country lords are quickly overwhelmed because they do not see the overall market, but fight for their own advantages, so that international coordination becomes necessary. We are talking here about the process of Big Deal Pricing, which requires central control and responsibility. Responsibilities for the list of (international) Key Accounts must be determined. We generally also recommend creating a central Big Deal database in which the agreed conditions and their validity are documented.

Centralized Pricing without uniform prices

This does not mean that there must be a uniform price for the entire region as part of this process. After all, different storage and transport costs, logistics and wage structures, service levels, call-off regulations and batch sizes or also IT integrations lead to different expenses, which also justify differentiated prices. The (European) uniform price is therefore usually still quite far away. A uniform underlying price logic is then the rule.

Centralization of Pricing: the Pricing Research

According to our RSEC model of pricing , pricing begins with a (hypothesis-guided) compilation of customer and market information on pricing and the value drivers in the respective market segment. It is advisable to process price information in the respective markets using a uniform methodology and systematics. This also requires a central responsibility for the Pricing Research (which, in our experience, few companies have).

Centralization of Pricing: international price strategies

In order to meet the expectations of some customers for uniform conditions and at the same time to be able to use different regional or national willingness to pay, an international price strategy is needed for each product area. The management should oblige product management to present this price strategy.

Centralization of Pricing: uniform implementation concepts

The control of (international) pricing becomes much easier if the corresponding levers and tools of strategy implementation are available. This includes standardized pricing processes, IT systems for pricing, incentive systems and communication tools.

Centralization of Pricing: The (international) price controlling

What is the task of a centralized price controlling? Ultimately, company-wide transparency should be established in which branches or subsidiaries the international price strategy is most effectively implemented. This is of course only possible if the individual price components (gross and net prices, discounts, discounts, WKZ, etc.) are uniformly defined and anchored in the IT systems. This type of price controlling has not really established itself in all companies. However, it seems to me that it is essential to establish this transparency in order to enforce a pricing strategy.

Centralization of Pricing: Learning from MediaSaturn

Florian Welz, who was responsible for this topic in MediaSaturn’s pricing at the time, gave me an exciting insight into the planned centralization of pricing at MediaSaturn in an interview on this very topic. The core statements for you again in brief:

• The responsibility for pricing will in future lie in Ingolstadt for the whole of Europe and be independent of product management / category management
• A data warehouse is being created for this purpose, which calculates the prices based on corresponding algorithms
• A large number of factors are included in the calculation, including the local as well as national competitive intensity as well as the online prices for the offered products
• The prices are implemented in the branches from Ingolstadt via ESL (Electronic Shelf Labelling) (at least for the technically equipped branches). There should be no multiple price changes per day, as customer reactance is expected.

It seems to me that this is a very ambitious project. We will see what hurdles will arise during implementation.

But we should assume that many companies initially strive for greater transparency of international pricing and that central influences will increase in decision-making in a second step.

The next Pricing-Newsletter: Pricing for Convenience Shoppers

And finally, again the reference to the topic of the next Pricing-Newsletter: we will turn to the question of what pricing for Convenience Shoppers looks like according to our LSDC matrix.

Best wishes and until the next Pricing-Newsletter – and maybe we will see each other soon in Hamburg in my next Pricing Seminar?

Your Prof. Dr. Hans-Christian Riekhof