How to Go from “Good” to “Great” with Pricing Software

From “Good” to “Great” with PricinG SoFtwareFrom “Good” to “Great” with PricinG SoFtware

1PB

By Craig C. Zawada, Chief Visionary Officer, PROS

Unlock Your Data • Unleash Your Sales

How to Go from “Good” to “Great” witH PricinG Software


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GrowinG comPlexity demandS SoFtware SolutionSover decades of experience advising companies about how to use pricing to their advantage, we recently observed dramatic changes in the pricing environment that suggest pricing software is a must have tool. the day is coming soon when most companies will consider pricing software an essential part of company operations, providing the foundation for sustained profitability.

the reason pricing software has become so critical is, in a word, complexity. complexity is occurring at every level of pricing management, from the formation of market strategy to perceptions of customer value, and from decision making at the transaction level to the foundations of every company’s pricing infrastructure.

to understand the changes occurring, it is helpful to break down pricing into four critical categories: (1) market strategy, (2) customer value, (3) transactions and (4) pricing infrastructure. in this white paper, we will examine the major changes in each of these categories that are shaping pricing practices today and explain how pricing software can help you manage these forces to your competitive advantage. most important, we will show how pricing software can ultimately take you from good to great when leveraging your unique pricing power to improve and sustain margins and profitability.

most companies today are not equipped to identify and take advantage of

geographic market differences through pricing segmentation


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MARKET STRATEGY: COST VOLATILITY INCREASING AMIDST MULTIPLE MARKET DYNAMICS

at the market strategy level, we’ve seen a dramatic increase in volatility for input costs across all industries. in the last 10 years, according to our research, there’s been a 40 percent increase in price volatility, and many companies simply don’t have the systems or tools to identify and keep up with input cost fluctuations let alone respond appropriately. See Figure 2.

the power to manage input cost volatility, however, can make a significant difference. For example, a computer server company faced a major challenge when an earthquake in taiwan destroyed a major component supplier’s factory. Because the server company knew the components were going to increase in costs, they responded immediately to increase their prices while their competitors lagged more than a month behind them. this server company was able to make an additional $20 million in profit from that ability to respond more quickly to cost changes.

the proliferation of multiple markets has also become a significant factor in

pricing market strategy. our research indicates that the market dynamics of two different city locations in the same european country, for example, can show wide variations in competition, perceived value, and therefore sales success and profitability for the same product. most companies today, however, are not equipped to identify and take advantage of geographic market differences through pricing segmentation. the result is lost opportunities to improve margins and profitability.

CUSTOMER VALUE: MORE SOPHISTICATED BUYERS, MORE SEGMENTS, SHORTER CYCLES

another significant trend in pricing today stems from the power that purchasers have gained over producers in the marketplace. last year alone, companies spent more than $3 billion to purchase e-procurement software to gain an advantage in negotiations. See Figure 3.

at the same time, we’ve seen an explosion in the number of product segments as consumers and businesses demand products and services that are

Figure 1: illustrates the four key areas of pricing power: market strategy, customer value, transactions, pricing infrastructure.

• increaSinGly Volatile

• multi-market ParticiPation

• more SoPhiSticated BuyerS

• ProFilFeration oF SeGmentS

• Shorter Product liFecycleS

• diStriButed deciSion makinG

• cuStomized/comPlex dealS

• many diFFerent conStituentS, dynamic marketS

Market strategy

CUstOMer VaLUe traNsaCtIONs PrICINg

INFrastrUCtUre

PRICING POWER


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customized to their wants and needs. this creates an enormous challenge for pricing, and makes a cost-plus approach obsolete. the conventional approach of juggling mounds of figures on spreadsheets simply can’t keep pace with the frequency and complexity of various customer segments and requirements for customization and deal negotiation. Shorter product life cycles are also a factor in pricing. Products that once took years to develop are now introduced in a matter of months. From a pricing standpoint, companies need the ability to price correctly from the very beginning since there is no longer any margin for error.

TRANSACTIONS: PRICING WIDELY DISTRIBUTED; DEALS GROW IN COMPLEXITY

much of the profit increases over the last few years have come from reducing variable and fixed costs. these cost-cutting measures, however have reached their limit, and savings are much more difficult to find. Plus, the elimination of layers of management has typically pushed pricing decisions much lower in the organization. Some companies now have hundreds or even thousands of people involved in making pricing decisions. the

result is an explosion of complexity as pricing involves more people in highly complicated negotiations with buyers juggling myriad of discounts and promotions.

we have also seen that transaction pricing has become more complex because of the explosion of custom deals. Fifteen years ago, for most B2B companies, 80 percent of customer deals fell under standard discounts, terms and conditions and 20 percent were custom negotiated deals. today, the opposite is true for most sellers. they must contend with an enormous amount

of special terms, conditions and discount structures – and most do not have the tools to manage this.

PRICING INfRASTRUCTURE: MORE PRICING PROfESSIONALS, MORE SOPHISTICATED SOfTWARE TOOLS

Given the changes described here, it’s not surprising that we are seeing the growth of pricing departments and professionals devoted to pricing within many organizations. and, to manage the complexity of all the pricing variables involved, these professionals are relying on pricing software to help

Figure 2: research shows a 40 percent increase in price volatility over the past 10 years.

3.84 4.09

5.49

4.64

3.82

6.3

1981-1990 1991-2000 2001-2010

Average MonthlyPrice Change

Standard Deviation

Source: Indexmundi.com, Pros Analysis


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capture, process and disseminate pricing guidance when and where it is needed. Pricing software is critical to equipping sales people in the field with information needed during the process of negotiating prices.

HARNESSING YOUR PRICING POWER WITH SOfTWARE: fROM GOOD TO GREAT!

For companies that have cut costs as far as they can, boosting profits further demands they explore their potential pricing power. But, far too many companies today are using antiquated and inflexible tools to manage the complexity of today’s pricing environment. they don’t possess what we call an “institutional memory of pricing.” that is, the collective wisdom of pricing in the organization is not brought to each and every deal. this often leaves their sales people isolated and on their own when negotiating with both customers and suppliers. companies today need to capture and bring the collective pricing experience, wisdom and memory of all corporate staff and sales people to bear on every transaction.

the good news is that customer and pricing software technology has gotten

much better in the past few years. data on customers and transactions is much more available through erP systems, while storage and computing costs are far less. most important, pricing software has evolved to take advantage of this data and find the nuggets of margin opportunity by applying sophisticated science to finding opportunities. the proper implementation and use of pricing software creates pricing power for a company. warren Buffet has said the number one thing he looks for in a company is pricing power. Some

companies can exercise pricing power at will. But most companies have to work very hard at it and for them pricing software can make the difference between achieving it or not.

GAIN SPEED AND AGILITY fOR CUSTOMIzING MARKET STRATEGIES

coping with the forces of input cost volatility and significant local market differences requires speed and agility in pricing. Software technology provides

Figure 3 - Buyers gaining power over producers using procurement technology.

3,200

~180

E-Procurement Pricing

Source: McKinsey & Company Research (2009), Gartner Research (2010)

Spend on software tools - ($ Millions)


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the means to take good strategies such as logically grouping local market areas by shared characteristics when pricing, to the development of “price zones” based on the scientific analysis of customer segments. this allows corporate office sales, marketing and pricing staff to clearly identify dynamic segments and react much faster to changes in local market conditions and competition.

at the same time, pricing software enables companies to go from monthly or even weekly manual evaluations of cost inputs to making price adjustments

in real time --- often in a matter of minutes or a few hours --- so that prices accurately and immediately reflect the fluctuations of input costs when it makes sense. For one distributor, we have seen this flexibility improve margins by over 100 basis points alone across an entire product line. Figure 5 highlights technology’s advantages that can take companies from good to great pricing practices.

fIND AND EXPLOIT KEY VARIABLES IN CUSTOMER VALUE

while many companies do a good job of making list price adjustments based on category-level analysis of pricing opportunities, they struggle with getting much more visibility into key differences among individual products. For example, a construction equipment company used to adjust its prices at a product category level. all hydraulic fittings would get the same price increase every year. however, they were missing the unique “dna” of each Sku even by this category-level action. Some of the fittings were low-volume and difficult-to-find alternatives, whereas others were easily replaceable with off-the-shelf parts at a local supplier. in addition, some were already much higher priced than competitors, and others still had room for increases while remaining below competitive alternatives. as a result, the company was under and over pricing many of its hydraulic fittings. Pricing software can deliver a granular level of analysis that makes individual product pricing not only possible but a competitive necessity.

Pricing software allows companies to set list prices for individual products

Figure 4: Pricing power is a critical component of business success

“The single most important decision in evaluating a business is pricing power”

Warren Buffet—February, 2011

S P E C T R U M O F E A S E

“Do no wrong”(very few companies)

Extremely hard work,and investment required

(available to most companies)

The ultimate goal: Develop “Pricing Power”

to manage the complexity of all the pricing variables involved, professionals are relying

on pricing software to help capture, process and disseminate pricing guidance when and

where it is needed


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based on a sophisticated analysis of each product’s pricing history as well as comparisons with other products in similar categories. this capability enables companies to quickly and easily identify underpriced products and calculate the trade-off of margin to sales for specific list prices. See Figure 6.

PROVIDE MEASUREMENT AND GUIDANCE fOR EVERY TRANSACTION

despite the wealth of information generated by customer management systems, many companies are

hard pressed to utilize it fully when developing price guidelines and decision rules for setting and negotiating prices. Pricing software technology provides a much more in-depth understanding of a customer’s transactions and behavior so that underperformers can be identified and the biggest margin opportunities can be acted upon. Just as important, pricing software can provide ongoing access to an account’s transaction profitability (taking into account all of the special terms and conditions and costs to serve) and compare it to other like customers to find potential improvement opportunities.

our experience has revealed that sophisticated transaction analysis often shows the most potential for margin improvement exists among customers in the middle range of the profitability distribution. many companies have taken tactical measures to find the extremely low or negative profit customers. Few have applied the science to identify average profit customers that could do a little better when comparing them to other like customers. this is where scientific segmentation improves the negotiating confidence of the sales force in pushing for increases in prices and margins when it makes sense. Pricing software can provide more accurate floor, target and stretch price guidance at the point of negotiation and empower the sales force while enforcing accountability. See Figure 7.

BUILD PERfORMANCE MEASURES INTO YOUR PRICING INfRASTRUCTURE

to fully exploit the power of pricing software requires a company’s pricing infrastructure be aligned with the capabilities inherent in the technology. that means moving from the usual categories of reporting and sales incentive structures to the use of true peer comparisons based on software tools that monitor and track

Figure 5: technology advantages for market strategy

Good PracticesLogically grouped localmarket areas on whichto base prices

Prices evaluated whenmajor cost shifts

“Pricing Power” with SoftwarePrice zones chosenand modified based onscientific segmentation

Real-time adjustmentsto prices based onchanging economics

From “Good” to “Great”MARKETING STRATEGY


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accountability and compliance with pricing policies across all levels from executive management to field sales.

with the increase in pricing departments and the number of professionals dedicated to pricing, and the phenomenal growth of available customer data, most organizations are poised to utilize their pricing power with readily available software tools. it makes little sense to try to recreate these reports in excel or other generic reporting tools when there are already best practices built into leading pricing software tools.

BEYOND PRICING MANAGEMENT TO PROfITABILITY

more and more companies are recognizing the powerful potential of pricing’s impact on margins and profitability. ProS has taken the lead in applying scientific analytics not only to manage, but actually help prescribe how and when products should be priced. ProS also has very powerful and flexible reporting and analytic tools that allow companies to conduct actionable dialogue around pricing. the advantages of adopting and implementing presciptive pricing software have never been greater. here’s what you can gain:

• react quickly to cost changes and changing local market dynamics

• apply sophisticated science to identify underpriced products

• adjust prices over the lifecycle

• commensurately equip sellers with data

• Provide scientific guidance on willingness to pay

• Provide full transparency to deal economics

• Build integrity into processes

• Provide true transparency on relative performance

• Build pricing bench strength

NEXT STEPS TO APPLYING THE POWER Of PRICING SOfTWARE

the business case for pricing software is no longer a question of “if,” but of “when.” those companies operating without pricing software will increasingly be at a competitive disadvantage. my favorite analogy describes these companies as attempting to land a commercial jet without instrument panels or controls. Pricing software is the means to gaining the visibility and control to successfully

Pricing software allows companies to set list prices for individual products based on a

sophisticated analysis of each product’s pricing history as well as comparisons with other

products in similar categories

Figure 6: using technology to enhance customer value

Good PracticesList price adjustmentsbased on category-levelanalyses of pricingopportunity

“Pricing Power” with SoftwareList prices set based onsophisticated algorithmsusing data on • Pricing history/ momentum

• Comparisons to like categories

From “Good” to “Great”CUSTOMER VALUE


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navigate the headwinds of marketing volatility and complexity.

if you have not yet evaluated pricing software as a strategic tool for your business --- or are in the midst of considering a pricing software investment --- i suggest the following steps.

1. assess where you are as a candidate for pricing software from the perspective of complexity and change in your own market environment.

2. examine the three categories of pricing to determine where you can gain the most leverage or value. is it in the realm of marketing strategy, customer value or transactions?

3. Finally, put together a team of cross-functional professionals in your organization to evaluate the pricing power potential of software technology. include an executive champion, sales and marketing management, inance,and field sales people to ensure you have buy in from all involved parties.

Figure 7: advanced transaction analysis optimizes prices

Good PracticesClearly defined andexecuted guidelines and decision rules for all price waterfall elements

“Pricing Power” with Software“Optimized” pricingtargets given at the pointof negotiation

Incorporate customer-specific cost-to-serve into price negotiations and in managing performance of accounts

From “Good” to “Great”TRANSACTIONS

Good PracticesCascading reports onmargins by region,customer, salesperson

Sales incentives forimproved marginperformance

“Pricing Power” with SoftwareTrue “peer comparisons”

Tools used to monitor and track compliance

From “Good” to “Great”PRICING INFRASTRUCTURE

Figure 8: Pricing software monitors and tracks performance accountability


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there is a proven path to realizing your own pricing power potential. it’s up to you to take the first step.

to learn more about ProS prescriptive software solutions, visit our website at www.pros.com or contact us at [email protected].

craig zawada serves as chief Visionary officer, at ProS, the leading provider of price management and optimization software. Prior to joining ProS in 2010, zawada was a partner and co-leader of the north american Pricing Practice at mckinsey & company, gaining experience across a wide range of B2B and consumer products. he is a widely published author on the subject of pricing strategy, with articles featured in the harvard Business review, mergers and acquisitions and the mckinsey Quarterly. he has been interviewed and quoted in Fortune magazine, cFo magazine, canadian Business and Business 2.0. zawada is co-author of the Price advantage, recognized as one of the most pragmatic books on pricing strategy available.

Craig C. zawada


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ProS holdings, inc. (nySe: Pro) is a big data software company that helps customers outperform in their markets by using big data to sell more effectively. we apply 27 years of data science experience to unlock buying patterns and preferences within transaction data to reveal which opportunities are most likely to close, which offers are most likely to sell and which prices are most likely to win. ProS offers big data solutions to optimize sales, pricing, quoting, rebates and revenue management across more than 30 industries. ProS has implemented more than 600 solutions in more than 55 countries. the ProS team comprises more than 700 professionals around the world.

to learn more, visit www.pros.com.

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How to Go from “Good” to “Great” with Pricing Software