The Price You Pay

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

Early adopters talk about profit optimization with the zeal of religious converts. David Feinstein, CFO of Rochester, New York—based metals distributor Klein Steel, says he’s not someone who is easily impressed, but he’s been consistently surprised by the information the company’s Acorn system has helped uncover. Klein Steel, which distributes steel, stainless steel, aluminum, and fiberglass products throughout upstate New York, has been using Acorn for the past two years. “Now we have a better understanding of where the actual costs occur on a customer and product basis for the purposes of allocation,” he says.

The impetus for looking into PO solutions came from Feinstein’s boss, who came to him after attending a trade show at which profit optimization was mentioned. “I was very skeptical,” Feinstein says, “which I guess is typical of finance, but I agreed to meet with the company. After a two-hour session, I was convinced that we needed to install it. Looking at the software, the algorithms, and the detail at which the software could delve into our business, I was very impressed. They were not approximating our costs but isolating them on a department-by-department basis.”

Many companies say the benefits of PO software are not hard to quantify. One of the key things Klein Steel discovered after implementation was that the company had the wrong idea about who its most profitable customers were. “You make a profit at the end of the quarter, but then you find out that you’re losing money on a third or half of your customers and you would actually be more profitable without them,” he says. By using PO software and having access to more-relevant data, the company found that although it consistently coddled its larger customers, it was actually the midsize customers that were the most profitable. “So we changed our orientation to the customers that fed our bottom line the most,” says Feinstein.

In addition to lavishing more attention on certain clients, Klein Steel also made some operational changes based on the data its PO software uncovered. In some cases where customers were receiving several deliveries a week, the company was able to cut deliveries down to one a week. This reduced delivery costs for Klein Steel and cut receiving costs for its customers. The company was then able to lower its expenses while keeping prices flat, essential in its highly competitive market. “If I could not pinpoint where my costs are, I would not be able to do something like that,” says Feinstein. “And if I could not pinpoint [the factors underlying] my net profit, then I wouldn’t even know we had a problem in the first place.”

Canadian apparel retailer Northern Group Retail Ltd. implemented a PO solution from ProfitLogic in September 2002, embarking on a remarkably tight, 13-week implementation schedule so that it could have the product in place for the holiday season, which accounts for 40 percent of its annual sales. The company’s CFO, Michael Stanek, says the software, which monitors sales data and inventory levels from Northern Group’s 278 stores and performs historical comparisons, helped the company move away from uniform chainwide pricing and discount strategies to an approach more attuned to regional needs, weather patterns, and other trends. As a pilot test of the software, the company offered various discounts across the country and didn’t mark down prices at all in some cases. “We saw we didn’t need to be so aggressive in marking down in some areas,” he says. “We are now managing markdown dollars and generating as much gross margin as we can in certain regions. We are not leaving any nickels on the table.”

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