The Price is Right: Price Optimization 101
NEW YORK--"The Price is Right" was the name of the game at the second annual destinationCRM2007 conference
here today. As part of the conference's exclusive Consultants' Corner, experts outlined the advantages associated with emerging pricing optimization technology and how it's revolutionizing antiquated systems.
It was during the second morning session of the Consultants' Corner that Jon Utterback, a specialist leader in Deloitte's Pricing Center of Excellence practice, discussed pricing optimization technology and how it represents a quantum leap forward from the standard Excel spreadsheet. "I've had clients actually write out a price on a piece of paper," Utterback told the crowd during his presentation. "That's the most unsophisticated way to draft a proposal."
Today's pricing analytic and optimization solutions are a far cry from the pricing books that sales and service reps have traditionally used over the years. Despite the emergence of the new tools, however, Utterback said that he believes the market is still a maturing one, and that most companies today cannot accurately understand the influence that pricing has on customer profitability. The prime culprit, Utterback told the crowd, is siloed information.
While CRM's strengths in lead generation, contract renewal, lead qualification, and order processing have been well integrated, the price development and quotation approval necessary for a sound pricing strategy have typically been handled outside of CRM systems using pricing books, Excel models, and manual quotes, Utterback said.
The new tools come in three levels of sophistication:
- Pricing analytics;
- Pricing execution; and
- Pricing optimization.
Analytics are the first step, enabling dissection by customer segment, product line/SKU, and time metrics--by month, quarter, year, etc.--to provide planned versus actual performance of customer deals. Along the same lines--but a step up the sophistication ladder--pricing execution allows companies to then enforce profitability targets through dashboards and exception workflow management. At the top of the evolutionary chart is price optimization, which Utterback referred to as the "holy grail" of any technology-based pricing strategy. At this level, a company is incorporating customer behavior and predictive analytics to provide price guidelines and suggestions that maximize profits. "This is where the heavy-hitting analytics and econometrics [are] involved to determine which are your most profitable customers and interactions, and [to] cross-reference that data across different products and delivery methods."
For those companies that invest in a pricing-analysis strategy, the results are almost always impressive, Utterback said. Companies can refocus their sales efforts on highly profitable customers who are willing to pay a premium price, and capture as much "share-of-wallet" as possible with price-insensitive customers. "You can increase price or eliminate unprofitable volume sold to smaller, lower-value customers that receive better price than large, high-value customers," he noted. "I've never had a client that hasn't gotten a solid ROI from this type of an investment." Utterback recalled one manufacturing client, in fact, who used pricing analytics to unlock $15 million in annual revenue with a 319 percent ROI.
Utterback also cited a life sciences manufacturer who increased revenues by 7 percent and pretax profitability by 6 percent. The key to such success, he said, is developing a sound strategy that identifies the key metrics and determines which prices will optimize profitability. "You're never going to be able to measure and analyze everything," Utterback said. "But by highlighting the big ones, you can really drive efficiency, and thus revenue, from your pricing analysis and customer profitability."
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