A cynic, we’re told, knows the price of everything and the value of nothing. Well, Michael Towe isn’t a cynic, but he does know the price of everything—or at least everything sold by GE Transportation International Pool (TIP) and GE Modular Space (ModSpace). As CFO of General Electric Co.’s Equipment Management division, part of Towe’s job is to set the prices on the company’s buildings and over-the-road trailer services.
Crucial to the task: making sure the prices he sets max out profits—without sending customers packing. To help strike that delicate balance, and to do it quickly, Towe relies on a special breed of software known as price-optimization (PO) technology. “The benefits have been substantial,” says Towe. “We are able to serve more customers with faster response times on pricing.”
A kind of business-intelligence program, price-optimization software appears to be catching on with other U.S. companies as well. According to International Data Corp. (IDC), a technology research firm headquartered in Framingham, Mass., sales of PO software, which totaled $86 million last year, will top $133 million by 2007.
Certainly, there’s no shortage of vendors marketing the stuff. IDC currently identifies 20 major companies (including i2 Technologies, KhiMetrics, Metreo, ProfitLogic, Rapt, Vendavo, and Zilliant) flogging PO software. “Pricing has historically been done in a very offhanded and intuitive way,” notes Robert Blumstein, CRM analytics and marketing applications research director at IDC. Now, he says, “pricing has become part of a larger movement toward marketing automation and CRM analytics.”
Essentially, PO software weighs scores of factors, including customer demand, desired sales velocity, and the amount of revenue a business needs to be profitable. Vendors offer either stand-alone PO applications or more-robust suites. The suites combine price optimization with other applications, such as demand-planning and pricing-execution programs.
The technique itself is not new. Airlines began using PO solutions in the 1980s to instantly price fares based on such variables as booking lead time, flight date, connections, time of day, service class, and customer preference.
Analysts say the arrival of faster and cheaper servers has piqued the interest of executives in other sectors. Indeed, companies are now able to run high-octane PO software without buying a supercomputer. Notes Paula Rosenblum, retail research director for independent research analyst firm AMR Research: “Advances in hardware have enabled [customers] to actually run these situations and forecasts in a reasonable time frame.”
Even with the rapid advancement in software and hardware, price optimization remains an inexact science. Various applications are likely to churn out different results. Why? Because PO programs are driven by proprietary forecasting engines. These engines are based on sophisticated mathematical algorithms originally developed for scientific research and military planning. “It’s almost like rocket science,” says Kosin Huang, a senior business applications and commerce analyst at The Yankee Group, a technology research and consulting firm. “It’s like the secret sauce that’s behind the whole thing.”