Big Fat Finance Blog: Pull the Pricing Lever
By Alan Radding | March 24th, 2010
Pricing may be both the biggest and most forgotten lever the CFO can pull with when trying to bolster the balance sheet. A 1 percent increase in price can result in an 11 percent increase in operating income, according to PROS Holdings, a pricing optimization vendor. Just correcting current pricing mistakes usually will give you that 11 percent increase.
Gartner put out a MarketScope report titled “Price Optimization and Management Software for B2B” last year. “The market for prepackaged price optimization and management software for business-to-business (B2B) sales processes,” according to Gartner, “expanded by 20 percent in 2008, despite poor economic conditions, largely due to growing recognition of the potential value such applications pose in helping companies defend margins and revenue, and realize efficiencies with pricing processes.” To see a copy of the report at Vendavo, another leading vendor, just click here.
According to Gartner, pricing software helps companies identify underlying shortcomings in pricing practices that erode revenue and margins, and more intelligently determine how much prospective customers will pay. The software also helps realize efficiencies in deploying, administering, and enforcing prices and pricing policies. Specifically, the researchers identify four ways in which pricing tools can help the CFO.
Few companies take a truly data-driven, analytic approach to setting and managing prices. Pricing software today has low penetration in the market. Instead, companies tend to take a marketing-oriented approach to pricing. After identifying the bare minimum the company needs to get for the product, Marketing takes over. Marketing looks at what competitors are charging and pegs prices accordingly, a little higher or lower depending on the marketing strategy. If Sales is calling the shots, you can be sure of rampant discounting, especially at the end of the month or quarter. Salespeople want to make their quotas and will always sacrifice margin to close a deal.
The use of pricing software, however, lets the CFO:
- Defend and improve profitability.
- Defend and grow revenue.
- Improve consistency in pricing practices by eliminating rogue discounting.
- Increase agility in tailoring pricing for specific markets or sales cycles.
It does this through a data-driven approach that employs sophisticated algorithms to arrive at the correct pricing to achieve defined levels of profitability and competitiveness. The algorithms are sufficiently sophisticated to anticipate and predict resulting customer losses as well as revenue gains if, for example, you raise prices. They provide a way to do what-if analysis around pricing.
Maybe you could do this yourself with a spreadsheet. In fact, PROS calls Excel its biggest competition. However, it is unlikely that you can come close to what any of the automated tools do.
The automated tools are not trivial. They collect a ton of data, usually pulled from big enterprise ERP and CRM systems, and load it into serious databases like Oracle. Full deployment can take a year. And they generally require big UNIX servers. Don’t expect to run this software on a spare PC.
Vendors like PROS, Vendavo, and others focus on the B2B segment. Similar pricing analytics for consumer products are provided through B2C pricing software led by DemandTec.
Reference Article: http://bigfatfinanceblog.com/2010/03/24/pull-the-pricing-lever/