In 2003, senior management at Emerson, a diversified manufacturing and technology company, realized there was a short circuit in its operations. Prices for the company’s broad line of electrical products were declining year after year, and while savvy materials management helped to compensate, that strategy could take Emerson only so far. To keep profit levels up, a power boost was needed.
That boost came from several initiatives, including one in the form of price-management software (also referred to as price-optimization, revenue-optimization, or, more simply, pricing software), which attempts to help companies ascertain the optimum prices they can charge in order to maximize the bottom line.
Senior executive vice president Charlie Peters, who oversees Emerson’s IT, marketing, customer support, and other functions, began implementing such software (from Vendavo Inc.) several years ago at a divisional level. All of the unit’s sales were logged in (including descriptions of each transaction) and within months the software pointed out revenue leaks in the form of policy deviations. For instance, company rules forbade granting discounts on products that lacked competition, yet salespeople “were writing loose contracts that at times gave a flat 35 percent discount without even thinking about putting in exclusions for those products,” Peters says.
That practice ended, as did other discounting deemed unnecessary. At the same time, visibility into the quote-approval process was improved, and Emerson began to require far more scrutiny from upper management for larger discounts. Furthermore, the software brought other managers, such as the division’s CFO, into the approval process in situations where nonstandard payment terms were offered. Within months the division cut the average discount from 24 percent to 22 percent, and by the one-year mark its profit margin improved by several percentage points.
Gartner analyst Michael Dunne says pricing software regularly delivers 2 to 5 points of gross margin increase for many users, and up to 15 points for some. And while it’s not cheap, the software typically pays for itself within a year.
Pricing software has been around for some time, but the market may finally be catching on: Gartner says sales were up 30 percent last year, to $150 million. But that still leaves plenty of room for growth. Revenue is often a notably under-managed part of the business, particularly for complex, global companies. Updating price lists alone can take months for manufacturers that have hundreds of thousands of stock-keeping units (SKUs). Enforcing the pricing rules is inconsistent and a compliance risk because records are usually kept in error-prone spreadsheets. “Obviously, revenues are more complex than payroll,” says Zack Rinat, CEO of revenue-management software vendor Model N. “It’s absurd to manage your revenue in spreadsheets.”
Revenue-management processes, which include pricing software, can be broken down into three components: price analytics, price optimization, and price execution. Price analytics looks at how your existing pricing is (or isn’t) working; it’s how Peters discovered those mindless 35 percent discounts. (Not that Emerson is unique in that regard: when Model N did a study for a customer, it found that the sales force had given away $50 million in unauthorized discounts.) “Most companies identify major low-hanging fruit in the beginning of the project because of improvement in visibility,” says Noha Tohamy, a research director at AMR Research.