The Price Optimization is Right

Economics 101 tells us that the market will dictate price. The real world is rather messier, however, as quantities, qualities, terms, seasonal factors or even the time of day can affect the true price of any deal. A soon-to-be-released Yankee Group report, "Why Innovative Companies Are Investing in Price Optimization, Execution and Analysis Solutions," indicates that a growing number of firms are turning to pricing software investments to help manage these challenges--particularly as they often generate substantial ROI. Depending on industry, such items as terms of delivery, service, and payment can account for more than half of margins. That realization is driving companies to look harder at their true pricing practices, and at how negotiated exemptions and exceptions can quickly add up to undercut any static pricing policy. "Pricing has been focused on putting a lot of Ph.D.s in a room to determine what the price is, but 70 to 80 percent of pricing is happening where the salesperson is negotiating with the customer," says Rafael Gonzalez Caloni, vice president of marketing for pricing software developer Vendavo. "Companies are collecting win/loss info from their CRM systems, and may have other databases or spreadsheets with useful information. When a price-execution vendor comes in, they try to grab that historical data and model elasticity," says Kosin Huang, Yankee Group senior analyst and the report's author. Once pricing patterns and customer habits are understood, pricing software can help identify ways to combat commoditization and close cost leaks. Fewer than half of the companies surveyed by Huang currently use some form of pricing software, whether a dedicated package or as part of a CRM or ERP system. However, almost half of the holdouts said they planned to invest in some version of the technology within the next 12 months. There are three distinct disciplines in the pricing technology space: price optimization, price execution, and price analysis. Optimization focuses on scenarios and profit maximization strategies, while execution specializes in making those strategies consistent and repeatable. Each can play a part not only in boosting revenues, but in reducing time required to quote and close deals. The seller benefits from the ability to adjust to changing market conditions rather relying on annual or quarterly pricing schedules that can become outdated, buyers avoid confusion and delays from conflicting policies and manual approval processes. "It helps customers track whether you as the supplier are delivering on the contract, and make sure the deals you have set on your prices have been executed," Huang says.