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The Price Is (More) Right

Improved technology – and leadership from finance – may help companies optimize their margins.

After several years of cutting costs to the bone, many companies are reacting to today’s soaring energy and commodity prices with trepidation: they would like to raise prices to maintain margins, but aren’t sure when — or if — they can successfully pass along increased costs to customers.

That may be good news for software vendors that make “price optimization” tools. While these applications are not cheap, they may win new converts as companies look for any source of insight that can help them improve and manage profitability, defend margins, and set a competitive price that markets will bear.

Although price-optimization software has been around since the dot-com days, the robust mid-2000s economy made it seem less than essential, and consequently limited the prospects of its original vendors. But with newer vendors debuting on the postrecessionary stage offering more-sophisticated, user-friendly, and intuitive tools, the market is reviving.

In the retail space, the tools are helping companies price some products to lure shoppers through the doors and others to maximize profit. In the B2B environment, the tools have a harder row to hoe, largely because the sales force essentially controls the customer relationship. The tools may spit out the optimal price to charge, but that doesn’t mean the salesperson will charge it.

As Michael Dunne, research vice president for price-optimization and sales-automation technology at Gartner, says, “The skeleton in the closet is the sales force. No one trusts what they’re doing, particularly the pricing desk. These guys are winging it based on a commission check. They’re your chief obstacle [to getting] the prices you deserve.”

Despite that barrier, Dunne notes that companies that deploy price optimization can gain a reliable two to five points in gross margin increases. The software, he says, represents a big step up from error-prone spreadsheets.

And just in time, too. “During the recession, companies did all they could to increase profits from the cost side, which was the only lever they had,” says Rafi Mohammed, pricing expert at consultancy Culture of Profit, and author of The 1% Windfall. “Now, with the recession [supposedly] over, and demand rising, there’s increased importance in getting the price right.”

Getting the price right is on the minds of many CFOs, according to a recent survey from CFO Research Services and American Express. The study found that while 54% of respondents spent the past two years “controlling costs to maintain profitability,” today two-thirds are more focused on top-line growth. As companies shift their focus from surviving to thriving, pricing becomes paramount. “If you get pricing right first,” says Michael Simonetto, founder and global lead of Deloitte’s pricing and profitability management practice, “the competition won’t catch you.”

How It Works

Today’s price-optimization software is fundamentally different from what was offered in version 1.0. “The early tools were just consulting disguised as software,” Dunne explains. “You needed smart, expensive people to interpret the data. Consequently, early vendors like Rapt, Metreo, and Revenue Technologies failed and were bought up by consultancies.”


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