The Demand Solutions Blog

Four Common Misunderstandings about Centralized Revenue Management

Posted by Donald Davidoff on Jan 23, 2019 12:35:33 PM

Team of pricing revenue managersThere’s an interesting debate we’ve seen start to percolate in pricing and revenue management (PRM) these days—whether to have pricing authority centralized or whether to decentralize it. From the examples we’ve seen with clients and prospects, there seem to be three approaches: 

  • With centralized pricing, there is a team of PRM experts in the headquarters (or home office) generally regarded as having pricing authority. They may (should) collaborate heavily with the field, but in the end, they control the process and the data flow. 
  • With decentralized pricing, pricing authority is delegated to the field. This can reside solely with operators/sales teams or it can be structured such that a divisional or regional VP has her own pricing person collaborating with her team.
     
  • A third option we’ve seen involved establishing a centralized PRM team but leaving pricing authority clearly in the hands of field operations/sales. In this scenario, the central PRM team acts more like a set of advisors or internal consultants as opposed to controlling the process the way a “pure” centralized approach would.  

The case for decentralization  

Often, the preference for either of the latter two comes from a desire to “empower” the field to control their own fate. They get bonused on business results, so the logic goes, “Why not give them full authority where they have responsibility and get rewarded (or punished) accordingly?” 

There are some compelling elements to that thought process. It makes sense, for example for pricing to “live” closer to where the customer is. Pricing can have a more intuitive understanding of local market conditions and make decisions more quickly when pricing associates are closer to the customer. Plus, when authority lies with responsibility, organizations can create more regional and site level engagement by empowering them to run their own businesses.  

Four common misunderstandings 

While we’re not opposed to decentralized pricing, we at D2 Demand do get worried that the case for decentralization ignores some powerful arguments in favor of centralization and may rest on a misunderstanding of what empowerment really means. 

  1. PRM is a specialized skill. For larger portfolios, centralization allows companies to build a core competence with multiple team members who complement each other and contribute to each other’s growth. Even in smaller companies, a centralized PRM individual can leverage other corporate associates in ways de-centralized PRM would struggle to do. De-centralized pricing associates are often “out on an island” on their own resulting in stunted PRM skill development.

  2. In addition to leveraging other corporate associates, PRM can also leverage experience they've learned from one property and transfer it to another. Lease-ups provide a good example of an area where expertise gained in one project can be transferred to another. A well-organized central PRM function maximizes an organization's ability to cross-pollinate good ideas and practices. 

  3. In our almost 20 years of multi-family pricing experience, we have found that the best companies create a “constructive tension” between pricing and operations/sales. If there’s no tension, then either the field doesn’t feel they have a voice or the PRM team “has gone native” and isn’t pushing hard enough. Decentralized pricing can institutionalize the latter. 

  4. To be empowered, associates need competence and bandwidth. Merely giving associates authority isn’t necessarily giving empowerment. In fact, it can be very empowering to have something removed, thus freeing up time, taking away angst from juggling too many things and removing the fear of being responsible for something in which one knows they may not have full competence. 

Why centralization means empowerment 

Examples of how field operations can be empowered by centralization abound in every organization. We know of no companies “empowering” their field by making them responsible for payroll or real estate taxes or other functions that benefit from centralized subject matter experts and software/systems. In fact, by centralizing these functions, we free the field up to focus on the things they are best equipped to handle. Sometimes less responsibility/authority results in more overall confidence and control. 

This reminds me of one of the key lessons from Stephen Covey’s seminal book, 7 Habits of Highly Effective People. In one section, he talks about how many people mistake “independence” as being the highest state of being (as compared to “dependence”). In fact, the highest state of emotional contentment and personal productivity comes when we are “interdependent,” not “independent.” 

That’s ultimately the key to successful PRM organizations. While we favor a centralized team, it must be built on collaboration, thus interdependence, with operations and sales. It’s the “constructive” part of “constructive tension” mentioned earlier that makes it work. This also likely applies to other functions as well. Marketing, particularly digital marketing, comes to mind. 

At D2 Demand, our team has more than 100 years of experience building, leading and coaching interdependent teams. We’d love to hear from you how you do this…and would be honored to help you do it even better! 

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Topics: Revenue Management, pricing and revenue management