Priced to Sell

Profit is important. It is, after all, the bottom line.

In e-tailing this simple truth became lost for awhile while companies scrambled for market share or just having a Web presence. And then came the "bots," which seemed to put all the cards in the hands of the consumers. But the founders of Austin, Texas-based Zilliant saw an opportunity, through advances in business intelligence, to make strategic pricing a competitive reality for companies doing business on the Web.

Rather than seeing the increased price sensitivity unleashed by the bots as a profit destroyer, Deborah Vollmer Dahlke, Zilliant president and COO, explains: "It's more that the flexibility of pricing and access to information can actually unleash pricing potential," says Vollmer Dahlke. "There was that blip in 1999 where people weren't focused on making money, but that has changed." Zilliant hopes to show them the way through intelligent pricing.

Today, Zilliant software provides online businesses with real-time feedback on customer behavior and competitive pricing to support dynamic pricing decisions. The company's first product, the Zilliant Computer Pricing Monitor, used Excalibur Technologies' automated search agent to capture computer pricing across the Internet. Excalibur has been a pioneer in the field of knowledge retrieval since 1980. Driven by an innovative hybrid search engine, Excalibur's RetrievalWare WebExpress understands natural language queries and translates them into concept-driven searches that return not only exact matches but results that are synonymous with the original query terms.

The company now positions itself in the electronic customer relationship management (eCRM) space "somewhere between the content managers like the Vignettes and the Broadvisions and the analytical software providers like E.piphany," In the meantime, Zilliant has built its own tools for price monitoring. "We have by no means abandoned the Excalibur technology," says Vollmer Dahlke. "We just needed to simplify. In some ways, I think because of our use of it on the Internet, we've pushed its (Excalibur's) limits a little bit."

While Zilliant's customer base consists exclusively of online computer and peripherals businesses, the company has plans to branch out into the financial services and pharmaceuticals industries. Zilliant currently monitors, on a twice-daily basis, approximately 1,000 base units across four or five computer manufacturers. Since every computer's base price has roughly 20 to 30 possible prices that can be added on to it, the volume and complexity involved in the task is enormous. According to Vollmer Dahlke, Zilliant has tracked over a million price changes in just the last two months.

Today, the Zilliant Intelligent Pricing Solution (ZIPS) consists of these integrated components: Zilliant Dynamic Pricing Lab, Zilliant Price Monitor, Zilliant Site Monitor, Zilliant Profile Wizard and Pricing Analyst Workbench (see sidebar). The solution, or any one of its individual components, can be implemented on a customer's e-commerce site or over the Internet as an ASP. The applications integrate with front and back office systems through API calls.

Zilliant takes care of the installation and customization of the software. "We have to," says Vollmer Dahlke. "It's expensive software--we're talking about $500,000 to a million dollars for a full suite of tools. The good thing is that the return on investment is very, very fast."

As proof, Vollmer Dahlke points to a McKinsey and Company study finding that a 1 percent change in price can bring about a 12 percent change in profits. So, for example, if you have a business unit that takes in $100 million in sales and you raise the price just one percent, when you take away the variable and fixed costs, that one percent increase can result in a 12 percent increase in profits. Of course, scale is everything. If you only sell 10 of something, the benefit isn't going to be as significant as if you sold 10,000.

Pricing for Profits
In the case of one Zilliant client, an online computer vendor, the company used intelligent pricing to create a strategic opportunity around a new product introduction. Based upon historical price data collected by Zilliant, the vendor decided to set the normalized price on one of its desktop models, featuring the newly introduced Pentium III-600 chip, $100 below its major competitors. Almost immediately, the vendor's home/home office market segment showed an increase in purchases that was sustained over several months. In fact, total unit sales increased 66 percent in the first week.

Visits to the vendor's Web site also increased significantly over an extended period of time. Even though after a two-month period the price went back up to the same level as the competition's, and the base configuration being offered was no longer the Pentium III-600, the vendor continued to reap the sales benefits.

However, the same wasn't true for all market segments. The vendor's small business customers were slow to react to the lower prices, and rather than seeing a sharp increase in sales, there was only a slight increase. That is because, in this particular market segment at least, the customer often makes buying decisions based on a set pattern, for instance, every six months. The lesson learned: Because of the different buying patterns of the two market segments, there was no need to lower the price offered to small businesses, or the lower price should have been extended for a longer period of time to this segment in order to see an increase in sales.

By providing its clients with the ability to better understand their customer segmentation and pricing behavior, Zilliant is working toward a one-to-one pricing model where, according to Vollmer Dahlke, clients will not only be able "to price more discreetly for different customers but also to deliver those prices individually."

This type of pricing strategy has raised some alarms in the past--the most recent case being Amazon.com, which was criticized by customers for altering prices based on customer information. At the same time, it is widely accepted, especially in the business-to-business world, that geography, turn-around time and quantity are all variables that go into determining a product's price. "The thing you have to remember," says Vollmer Dahlke, "is that our clients are not just delivering prices; that around the whole decision-making process is value and how people perceive value."

In the future, Zilliant will be looking at ways to use the Excalibur search agent internally. Zilliant is also adding a headline news feature that will be provided by the Excalibur tool so that when clients open the daily e-mail alert listing price changes for that particular day, they will also receive the top three or four headlines.

"There is no category or company that is immune to the revolution in pricing," says Vollmer Dahlke. "If your competitors are changing their prices rapidly and you aren't because you don't know how much to change them, you're leaving money on the table. Or worse, you are just getting totally beat out."