Drive Demand Profitably Through Pricing
Companies that have put a strategic focus on how prices are set, negotiated, and managed have seen up to 10 percent in incremental revenue. Although the potential reward is great, it requires companies to rethink their assumptions on pricing and to realign policy and process. It also requires companies to invest in price optimization and execution systems to add science to decision-making, and to add consistency to process and policy management.
The truth is that every company can benefit from revenue management strategies. Advances in technology and analytics are allowing companies to aggregate more data and perform more advanced modeling than the older yield management systems used by the airlines and retailers. From new-product price setting to establishing pricing rules for sales to managing the workflows for contract and order approval, pricing applications are helping companies grow revenue in a sluggish economy.
Revenue Management
Less than two years ago not many people outside the airline and hospitality industries were thinking about pricing software, and if they were the software probably consisted of an Excel spreadsheet enriched with some Visual Basic coding. Now, after a few early implementations estimating returns in the millions, companies are looking at pricing applications as a way to do the unthinkable in a sluggish economy: grow profits by increasing revenue, not by cutting costs.
Revenue management (RM) is a combination of demand management, yield management, and price/order management strategies. The need for technology comes from the fact that the amount of information available and its sources is growing at an enormous rate. Without a centralized database and a repository of rules, it would be impossible to successfully manage one of these strategies, let alone all three. Analysts and sales managers need a more advanced environment than what Excel provides to keep up with changing markets and company goals.
Although a technology slant has crept into RM discussions over the past couple years, there is still much a company can do by simply rethinking the way it prices or by conducting a more detailed analysis of its customers and products. Fundamentally, companies need to change the overall way they are pricing products. Price shouldn't be seen strictly as a function of cost or competitive prices. It needs to take into account that certain customers associate more value to some products than to other products.
AMR Research has identified six steps that are common in all successful RM deployments. Many of these steps can be completed without deploying any additional lines of code. The steps below needn't be linear in progression, and don't have to be done in preparation for an application selection or deployment. In fact, any company would benefit from taking part in the exercises below.
Analyze your current pricing policies This exercise should look at how you set prices and how they are carried out through your sales processes. According to strategies in RM, prices should be set in a way that reflects the value your products have to individual customers at a given point in time. Although cost can't be ignored, it should be considered along with other data on price elasticity, market demand, and competitors.
Apply segmented channel management strategies This means understanding the profitability of your products by channel and customer. This will uncover the different perceptions of value of your products in micromarkets. Once you understand the value of your products across your channels, you can more accurately allocate inventory, establish price ceilings or floors, and set discount bands that can be monitored and measured.
Look for sources of demand indicators The better you are at forecasting demand, the better you will be at managing your revenue stream. Accurate demand information is the most valuable piece of information a company can have. A faster understanding of market needs allows you to more quickly move price and inventory to levels that match demand.
Understand the value of your customers This determines which customer relationships are the most valuable to you. You should build a framework with detailed information about revenue generated and costs incurred by serving each customer. This ensures there will be inventory for your most valuable customers, or lets you know when lowering your price on a product can be made up for in services.
Identify where money is being left on the table This step is the one that is most reliant on the others. By comparing all the information you will have gathered, opportunities should start to become apparent. Because of the large amount of information the other activities will yield, companies need to look toward technology to help them identify opportunity and evaluate their micromarkets.
Continually reevaluate the strategies and information in steps 1 through 5 The steps above aren't a one-time analysis. Conditions in the market are in constant flux, and therefore your pricing tactics should be as well. New product introductions, end-of-life of other products, changing competitive pricing, and customer needs all play a role in determining your price. Price optimization engines help make sense of all the data faster, and execution systems help execute pricing decisions without human intervention. Both will free up time to do more strategic work and evaluations.
Recommendations
Start collecting data now. As mentioned earlier, data collection and mapping exercises lead to the biggest project delays. Also, collecting data will help you understand correlations between market demand, price levels, and overall margin. This is crucial whether you will be deploying a pricing application or simple enhancing your spreadsheets.
Begin to evaluate your micromarkets and the value you bring to each. This is crucial in understanding where margin can be increased in your base. It isn't necessarily by raising prices. Many have found that the information and results allow them to set aside capacity for more profitable products and customers.
Consider assigning more employees to focus on pricing initiatives. Revenue management is an equal mix of business strategy, operational policies, and technology. Because of this there needs to be a close relationship between the people installing the applications and those who will be using them.
About the author:
Kevin Scott is a senior research analyst, customer management service for AMR Research. Scott's research focuses on companies' utilization of e-business applications to enable marketing and other demand-and-revenue management strategies. He is also responsible for monitoring industry trends and developments within this market. His coverage includes marketing automation applications, analytics, revenue management, and customer data management. Previously Scott worked for Reebok International, responsible for managing the daily operations for Reebok's Lady Footlocker national account. He coordinated marketing campaigns and analyzed sell-through results. While at Reebok he also worked as sales planning analyst, where he forecasted sales, studied market trends, and analyzed past sales data to create tailored sales plans for retail accounts. Scott holds a B.A. in Communications from the University of Rhode Island, and is currently pursuing an MBA with a marketing concentration at Bentley College.