Leveraging flexible pricing strategies in Working Capital Funds (WCF)
Federal CFO Insights
An opportunity to improve capital management and optimize the alignment of resources to mission needs.
The transition to dynamic pricing
Dynamic pricing is emerging as a leading pricing strategy used by companies across business-to-consumer and business-to-business sectors to capture the most value for their products and services. This pricing strategy involves changing prices, often in real-time, in response to changes in supply and demand. It is challenging the way of doing business for companies that have long conformed to fixed prices.
Considering its widespread adoption in the commercial sector, does dynamic pricing have a place in a federal environment? While federal agencies do not share the same profit driven incentives, the principle of dynamic pricing has potential to improve capital management, particularly for government programs operating under a Working Capital Fund (WCF) where a buyer/seller relationship exists. In a WCF environment, customers and market factors play important roles in driving the price setting process, and a more flexible pricing model can lead to improvements in capital management.
In the past 15 years, several WCF investigations led by the Government Accountability Office (GAO) involved poor capital management involving large cash surpluses and balances. This is evidence of a common problem for many WCFs needing a more flexible approach to demand projection and price setting. For Federal CFOs, dynamic pricing for a WCF may be unrealistic, but the introduction of more flexible pricing strategies may be an attractive option for discretionary products and services of mature WCFs. A flexible pricing strategy can help Federal CFOs reduce the impact of changes in costs or demand, and derive an optimal price for their services. This has the potential to improve capital management by reducing the risk of large cash surpluses or deficits, and contribute to the underlying objective of WCFs: optimize the alignment of resources to support mission needs.
Benefits of flexible pricing in WCFs
Flexible pricing strategies can serve as powerful catalysts to drive value for Federal WCFs, their customers, and the organizations they support. By leveraging information on cost drivers, consumption patterns, customer preferences, and organizational goals, flexible pricing brings three major benefits to help Federal CFOs improve capital management for the organization. These should be evaluated as a net benefit to the whole organization, comprised of both the WCF and offices directly involved in advancing the agency mission. Changes should seek to improve capital management for the whole organization without transferring risk to customers (e.g. appropriated offices) that do not enjoy the funding flexibility of WCFs. The three benefits include:
- Flexible pricing can normalize demand for discretionary products and services
- Flexible pricing can reduce the risk of change in operating costs and returning large unanticipated profits or losses
- Flexible pricing can optimize the alignment of resource to mission needs
Imperatives for using flexible pricing in WCFs
First and foremost, flexible pricing works best when applied to WCFs for discretionary products or services where customers have purchasing power, as opposed to being confined to a tax with limited flexibility to opt in or out of services. This implies that the products or services can be procured externally from the WCF, such as support for dedicated trainings, application development and enhancement, and project management services among others. Understanding this fundamental distinction, flexible pricing is poised for success in mature WCFs that encourage the following success imperatives:
- Comparative net cost impact to the organization to guide flexible pricing
- Advanced data analytics to substantiate flexible pricing
- Mature and transparent relationships with stakeholders to support flexible pricing