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The Price Is (More) Right

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

The new kids on the block came into the market from one or more of the three services that define the business today — price analytics, price optimization, and price execution — and then rolled them up into an integrated model backed by complex algorithms.

Price analytics is a way to cull insight from past transactions retrieved from point-of-sale data or from your sales force. With analytics, “you can learn which products are central from a margin standpoint,” says Craig Zawada, a former partner and co-leader of McKinsey’s pricing practice and currently senior vice president of pricing excellence at PROS. “We’ve developed 50 different variables — like share of invoice, volume trends, and customer total revenue — that can be analyzed based on the transaction data to provide indicators of opportunity.”

After the analysis, price optimization generates models that draw upon market data to project realistic “best prices” or price bands for specific markets or sales situations. “This can pinpoint where you can get higher prices and margins from a customer and a product, inching higher here or dialing back a bit there,” says Zawada, co-author of The Price Advantage.

Price execution focuses on conveying pricing details and enforcing approval processes to inform the sales forces and limit the risk of rogue discounting. “The rest,” says Dunne, “is consulting work.”

The tools also offer insight into the sales force, in terms of whether their deals are aligned with profit objectives. In other words, are they charging a particular (lower) price merely to close a deal? “Many companies have relied on sales reps that had the interests of the customer and themselves more in mind than the interests of their employers,” says Tom Monheim, client-services manager at Kalypso, a consultancy specializing in price optimization.

Managing the Margin

However, leaning too hard on sales can be counterproductive. “Salespeople don’t take kindly to software and consultants telling them what price they can charge,” says Culture of Profit’s Mohammed. But Deloitte’s Simonetto insists that “without insight into each and every transaction made by the sales force, you can’t manage the margin.”

Consequently, price optimization becomes a concern for finance, which must determine whether the guidance it offers suits the company’s culture and strategy. “Men and women still need to sit down and make these decisions,” Simonetto says. “There has to be a smart person who understands the business to determine if the price is really right.”

With that in mind, “The person best suited to manage the margin is the CFO,” says Simonetto.

Sales-force resistance and related issues of corporate culture, however, are not impeding the growth of the price-optimization market. Most buyers are organizations with more than $500 million in revenue confronting complex pricing requirements. These include B2B verticals in the distribution, electronics, industrial manufacturing, high-tech manufacturing, and chemicals industries.

“We’re also seeing growing interest from medical-device makers and consumer-goods companies,” reports Dunne. Gartner estimates that price-optimization and
-management software will become a $425 million market in the B2B space by 2013, up from $180 million in 2008.

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