The Price You Pay

Companies say price-optimization software is worth the effort it demands.

Companies have grown accustomed to using information technology to design, manufacture, and ship products, and to slice and dice the numbers in every conceivable way after the fact. But what’s less well known is the role IT can play in determining the optimum price for a product or service. Since “optimum” equates to “most profitable,” the technology at the heart of these efforts goes by interchangeable names: price-optimization or profit-optimization (PO) software. While not new, PO software is poised to go from the fringe to the mainstream, say analysts, vendors, and, most important, customers. That’s being driven by a number of factors, including the pioneering companies going public with their successes and large software vendors taking an interest in adding PO products to their product lineups. Despite the still considerable implementation challenges, the financial rewards from these products may now outweigh the risks—for some customers, at least.

“This year will see practical acceleration, deployment, usage, and value coming out of the use of profit-optimization technology,” says Scott Langdoc, vice president of research for the retail industry at Boston-based AMR Research Inc. Langdoc says the success of some of the small companies offering PO software has captured the attention of the big guns, which will try to get into the market themselves by either developing their own products or gobbling up some of the smaller players. Some analysts predict SAP, PeopleSoft, and SAS Institute are likely to join the fray soon.

The entry of the bigger software companies into the market, coupled with the positive word of mouth from some of the technology’s early adopters, should help reassure large customers that have been wary about implementing these products. “There will be consolidation later this year and into 2005, and that will offer up the kind of stability that large customers want to have,” says Langdoc. IT research firm IDC predicts a 12.5 percent growth rate for the software through 2007.

One of PO’s ancestors is the yield-management software that gave a boost to the airline and hospitality industries in the 1980s by squeezing profits from the last-minute sales of vacant seats and rooms. More recently, the retail industry has been an enthusiastic user of such products, often employing PO software as a defensive move against “big box” stores such as Wal-Mart, which have led the charge in this niche. Major retail chains, including J.C. Penney, Best Buy, Home Depot, Gap, and Staples, have all announced that they have PO programs currently in place from retail-oriented vendors such as KhiMetrics, DemandTec, ProfitLogic, and Manugistics. Other vendors, such as Acorn Systems, Rapt, and Metreo, have concentrated on providing PO software to companies beyond the retail sector, including Honeywell, DHL, and Charles Schwab.

Costly Customers

The software puts its arms around a lot of data, both internal (some of it builds on work done in activity-based costing) and external (analyzing past customer response to price promotions, for example), to help users determine an ideal pricing strategy.

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