The Price You Pay

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

Pete Algero Jr., CFO of New Orleans—based Conco Food Service, a food service distributor to restaurants, hotels, nursing homes, and hospitals, says PO software from Acorn has helped improve both customer and vendor profitability since its implementation four years ago. “Before we got the software, we created an internal report giving us an average or estimate on customer profitability, but we never had anything to tell us what our actual costs were,” he says.

By looking at the detailed information the software provides, Conco salespeople and department heads were able to see certain problems with customers that had once been hidden in rolled-up data. Conco discovered that some of its customers were taking too many deliveries, or their order sizes were too small to justify delivery costs, or they were not ordering the right mix of products to keep the deliveries cost-efficient. “That’s the nice thing about PO,” he says. “It uses actual costs detailed right down to the item level.” Even with a recent revenue drop of 9 percent, Algero says Conco’s profit margins have increased 150 percent. He attributes much of this to the company’s PO software.

To Gain, Some Pain

Despite their praise for PO solutions, all of these CFOs admit that the implementation process was not without its challenges. Deployment delays, some cost overruns, and technical glitches seem to be a rite of passage before companies can gloat about results.

“When we first started, things were very unstable,” says Algero. “We were basically guinea pigs. It also took a lot of time to explain to everyone how it works. It took about six months of meetings before the different salespeople and department heads really understood it.”

At Klein Steel, a good deal of work had to be done up front customizing the software to provide the kind of data the company needed. “It takes a tremendous amount of management and IT time to help them design the algorithms correctly, but once that is done, the software is basically maintenance-free,” says Feinstein. “All your pain is up front.”

The primary obstacle facing any company trying to implement PO software, according to CFOs, vendors, and analysts, is the cultural resistance from those at the front lines—salespeople, pricing managers, and department heads—who have been making pricing decisions on their own largely based on spreadsheet data and gut instinct. Many of these people feel threatened by software that tries to tell them what to do.

“[Cultural issues] represent one of the single greatest obstacles to rapid market adoption,” says Tim Manning, vice president of marketing at Scottsdale, Arizona-based KhiMetrics. “You have a new technology that, while proven, makes you no longer reliant on the ‘art’ of pricing. A crucial part of success has to do with rigorous education.”

“Historically, hundreds of millions of dollars have been invested with gut feelings, intuition, historical practice, and little insight into return,” adds Scott C. Friend, president of ProfitLogic. “It’s been like throwing darts at a wall. In retail, they hand checkbooks to untrained liberal-arts majors and say, ‘Go spend this money.’ Intuition does not get optimal results. It must be supported by really good insight into customer demand.”

The best way to increase user buy-in is to position PO technology as an enhancement rather than a replacement for individual expertise, according to AMR’s Langdoc. “Instead of ‘price optimization,’ it should be looked at as ‘price recommendation,’ complementing the experience of the people who are using it,” he says. “Adoption will increase when users are comfortable that they can combine their pricing strategy with recommendations from the software and then deploy prices that are defended by strong analytics.” One other factor will help, he adds: increased profit margins, which have a way of turning skeptics into fans.

John McPartlin is a New York—based writer and former editor of NetGuide magazine.

The Optimal Optimizer

Price-optimization software products are often tailored to specific needs, which can include:

  • Pricing new products
  • Pricing inventory for clearance, promotions, or incentives
  • Setting price lists for families or bundles of products
  • Establishing contract pricing
  • Designing what-if strategies for a number of circumstances

While many vendors play well in more than one category, analysts say none addresses them all effectively. Shop carefully.

Source: Forrester Research Inc.

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