Price optimization then asks what your price should be, given market conditions and retrospective models. It involves complex pricing science and forecasts. Peters first applied it to the Emerson divisions that conducted the most transactions and negotiations because the impact was likely to be largest there, but more recently he has extended it to divisions with fixed price lists. If a profit goal requires an overall 2.5 percent price increase, for example, the system optimizes individual product prices based on multiple dimensions (including geography, distribution channel, and brand) rather than raise every price on the list by 2.5 percent. Ultimately, however, it’s about power and risk, in that “we’ll increase price most where we have high power and low risk, and be most cautious where we have low power and high risk,” Peters says.
Price execution is the component that helps salespeople price a deal on the spot. A semiconductor distributor, for example, employs this capability in its sales-operations deal desk. When a call comes in, the salesperson pulls up the customer’s transaction history along with his “willingness to pay” score and can tell immediately what price the customer is likely to pay for the requested product. The salesperson can also see what similar customers are paying for that product, and how well the item is selling. If it’s a fast-moving product, she may decide not to sell it at a discount.
As mentioned, pricing software comes at a price: the project cost, including license and implementation services, runs upward of $1 million. An additional cost comes in the form of data collection and cleansing, which AMR’s Tohamy says often takes longer and proves more difficult than clients expect.
But according to a McKinsey study, a 1 percent price increase drives a 7 percent–plus boost in operating profit; a Gartner study is even more optimistic (see “How Pricing Impacts Profitability” at the end of this article). Having worked so hard to reduce costs, companies may decide that some time (and money) spent in assessing prices is the next major avenue of improvement.
Yasmin Ghahremani writes about business and technology from New York.