Investing In Price Optimization, Execution, and Analysis Solutions

Pricing solutions are one of the most closely guarded secrets of today’s leading companies. This is because pricing software generates an impressive ROI, typically 5 to 19 percent profit improvement. Also, it gives these companies each the innovative leader in its respective industry tremendous competitive advantage. If we peeked into these companies, we would see success stories about how organizations have turned around inefficient pricing processes and poor pricing analysis into real business benefits-revenue and margin uplift. These companies have taken charge of pricing and are actively optimizing, executing and analyzing pricing opportunities. However, they are still the minority. Why were these companies the first to adopt pricing technology? What were the key business drivers that made an organization-wide pricing initiative a worthwhile investment?

In a recent Yankee Group survey, 48 percent of the 456 respondents said they currently use technology to manage pricing. Meanwhile, 25 percent plan to buy technology in the next 12 months to provide customer-specific pricing electronically. The market for pricing software is growing. As the economy picks up, we are seeing renewed interest in technology spending around the pricing process.

2004 will be the year for price optimization, execution and analytics-software as market growth ramps up across key industries. In 2003, this market experienced limited growth because of cautious IT spending in new technology areas. As success stories from price software implementations emerge and IT spending rebounds, we expect renewed interest and growth in key verticals. Early adopters of price software in industries such as CPG, retail, chemicals, distribution and manufacturing will start to see their peers react competitively by buying price solutions.

The challenge for specialty pricing vendors is to turn what was previously a consulting opportunity for pricing optimization into a truly repeatable process, packaging it within an application set. This is already starting to happen. Although it is unlikely that price software will establish itself as a standalone market, the impressive ROI indicates it is here to stay. Over the next 5 to 7 years, large enterprise application vendors such as SAP, Oracle, PeopleSoft and Siebel might want a piece of the pricing-software market. The challenge for the suite vendors will be to replicate true price optimization and analytics in their product offerings.

Enterprise Recommendations

Do not wait for competitors to adopt first-seize the advantage. In each vertical market that has implemented a pricing solution, one innovator has taken the lead and seized the competitive advantage. Inevitably, two or three peers follow. This has happened in the chemicals, high-tech, media and transportation industries. HP improved its market share position by successfully maneuvering through two server price wars with its key rival, Sun Microsystems.

Start where you will have the most impact and expand or grow into other areas. Do not take on too many goals at once. Companies invest in areas of pricing where they will get the most bang for their buck-using technology to enable specific selling strategies such as market segmentation and promotional bundling, or stopping rampant price leaks. For many, it may not make sense to completely overhaul existing price processes. Do it one business unit at a time, focusing on one or two key pain points. Companies hesitate to invest in a new technology such as pricing software, so minimize the risk by proving out the investment one business unit at a time.

Revamp processes or extend existing price systems, but identify areas where technology can deliver the most benefit. Pricing is both a process and a technology problem; you must address them in tandem for maximum benefit. This is part of the reason some companies have waited to invest in the technology, believing they would likely be committing to an organization-wide process realignment project. Therefore, companies have approached pricing initiatives by focusing on one division’s specific problems, be they process or technology-related. Many early adopters start with analytics and then uncover the hidden areas where companies can capture the most value from better pricing. One of the benefits of starting with analytics is that it does not require much integration and involves little change management. Companies really only need to identify the correct sources of pricing data. Because analytics cause little disruption to an organization, many end users start here. Price stakeholders can arm themselves with reports on pricing and quickly demonstrate value to an executive audience.

Use technology because strategy consulting is not sustainable. Consulting is an event, not a repeatable process, and pricing is a dynamic affair. If you change prices, the market and competitors react; then you react and the cycle continues. The companies that choose to implement pricing software believe pricing is not a one-time event. Consulting engagements leave companies with a plan, but continuous execution is not guaranteed; nor is proactive management of external forces such as competitive discounting and market trends. If, in a perfect situation, a company does not have to deal with fluctuating discounts, negotiated offers and market forces, then consulting will work. Any other company that understands pricing is a dynamic concern will eventually need to take the technology route.

Do not be afraid that customers will get mad-this may lower prices! Companies considering pricing technology are often riddled with fear. Pricing is such an important lever; they are always concerned about taking a wrong step or how customers will react. A common fear is that customers will become irate once they learn the company is “charging for profits” or scrutinizing individual contracts.

Although pricing can be a sensitive topic, it is not necessarily inflammatory. Some customers equate price management with price gouging when, in fact, pricing solutions often work in favor of customers. Results could include: better price terms, faster quote turnarounds, improved compliance to seller’s contract terms and fewer pricing errors and rework. Companies may even lower their prices if a customer will accept a certain shipping method, delivery date or price term. Unlike B2C environments, prices do not determine the purchase in B2B environments. In one instance, a manufacturer offered discounts only to large customers and ignored small customers that bought in large volume. After implementing pricing analytics, it realized it needed to retain and capture more business from the smaller customers by offering volume discounts.