Pricing Leadership

Manufacturing.net and PROS’ Doug Fuehne, VP, Professional Services of PROS Pricing Software Solutions talk about how manufacturers can improve their pricing strategies and come out ahead as the economy turns around.

To get right to it, the five pricing strategies Fuehne suggests will help you come out ahead in the economic recovery:

1. Identify underperformers.
2. Proactively forecast future performance.
3. Increase organizational agility.
4. Focus on customer satisfaction to keep the customers you DO have.
5. Provide sales force with optimized prices and other highly relevant information in a timely manner.

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We have been discussing the impact of SaaS on IT decision making as well as sales force adoption.  It is clear vendors are working hard on the following questions:

• How do I make it easier for my customers to get my software in use and start getting value?
• How do I continue to provide value, while simultaneously (a) offering high business value innovation and (b) as little IT cost as possible?

Recently, HP and Microsoft announced they will be working together to simplify the software delivery model.  This announcement, coupled with other options Microsoft offers, such as Windows Azure and Dynamics xRM, point to larger strategy Microsoft intends to use to offer a spectrum of options to customers. This spectrum ranges from on-premises and custom apps, to cloud-based apps built by 3rd parties on Pinpoint.

Other vendor examples include Salesforce.com’s AppExchange and Force.com platform.  Oracle and SAP also have offerings. 

What does this mean for someone interested in Pricing Applications?

It will no longer be “good enough” for an application to be conceived independently of these larger ecosystems.  To offer a J2EE or .NET app is no longer enough.  It is now critical to consider the various vendor ecosystems in the decision to buy.

Is my pricing system going to be an island that I have to integrate into my ecosystem?  How much will that cost?

Does the vendor offer seamless integration into the ecosystem(s) I have chosen?  Will my pricing system be a “good citizen” in my chosen ecosystem(s)?

Most importantly, which systems do my users prefer to work in?  This question points to the larger struggle between users and IT, usability versus manageability, and conflict between ecosystems. This is most pronounced in situations where users work in Excel but the system of record for data is SAP.

The other day, I had a very interesting conversation with one of our customers. They just completed a customer survey to help determine the core reasons their customers valued them as a supplier. Many items were listed – service level, relationships, ease of procurement, technology, price, market leadership, quality and much more. Price didn’t make the top 5 (according to this customer, it ranked 7th). So what does this mean? Could they charge whatever price they wanted? Probably not — it just means that product volumes change due to many other variables other than price.

To understand the price to volume relationship, let’s look at two very different extremes – captive vs. commodity. On the captive side, let’s consider a highly customized enterprise software solution. Because it’s totally customized to your company – every change, upgrade or enhancement is subject to a work order, statement of work, or new contract. High tech companies who offer customized solutions know this fact all too well. A vital component of your business is in their hands. Their pricing for follow-up on services, maintenance and upgrades can border on egregious.

On the other extreme we have pure commodities. A great example is downstream petroleum products. After initial refinement, oil companies sell unbranded gasoline on an open market. Location, availability, competitive landscape and price are the only variables that need consideration. The lower the price, the more volume – it’s just that simple. Optimized pricing is all about understanding your competitive position and desired volumes at each terminal.

Chances are, your products fall somewhere between these two extremes. You’ve got legacy products that competitors have begun to commoditize. You also have innovative products and contracts that give you pricing power. Many companies struggle to understand which products have a captive audience and those products that have very low switching costs.

Despite this daunting task, there is good news – pricing science can mine your data across all of your products to determine their price sensitivity. By factoring out key variables (economic indicators, complementary products, seasonality and more), it’s possible to uncover the true price-demand relationship. With this knowledge, you can develop value pricing strategies by product line with confidence and understand how the market will react.

B2B Manufacturers and Distributors are departing from mass price increases and embracing targeted price changes based on market sensitivities. How are you making pricing changes?

We have been discussing the fact that sales adoption of pricing tools is a difficult problem to solve. Lately, I have been observing a pattern towards bringing pricing into the sales tools that exist today. These solutions utilize SaaS and mobility platforms. Recent SaaS examples I have observed include companies that utilize Salesforce.com and Microsoft Dynamics CRM. Recent mobility examples include companies that utilize Blackberry devices and Microsoft Excel, in a remote environment.

These companies need pricing to help in the sales processes. This includes quoting tools to help the sales team make the right choices. They need multiple price points, as guidelines to the process. Some want to know, “what is the right offer for my customer”?

What are the technologies required to support these processes? Here are a few that are important:

Real-time Quoting and Pricing
As the combination of possible products, channels, customer segments, and negotiation methodologies explodes, it is infeasible to store all pricing permutations on the CRM tool. Service-Oriented Architecture is critical for pricing. ERP vendors have solved this problem using rules. However, creating a copy of a rule engine in every application you use is problematic for many reasons I will not dive into at this time. Real-time architectures can grow as your business rules change, and help you to maintain a single set of rules. Flexibility is really important, depending on how quickly your business strategy changes.

Composite Application Support
To maintain user interface consistency, composite application architectures are really important. These architectures allow “mash up” style interfaces where components of pricing can be interweaved with other business process components. Salesforce.com has APEX. Microsoft has SharePoint and the Dynamics xRM platform. Single “large” applications are a thing of the past. Composite applications are where the market is heading, and it is heading there fast.

On/Off Premises Integration Support
I have heard from customers that they are uncomfortable having their pricing data “in the cloud”. Can vendors offer a composite sales and pricing experience that meets the best of both worlds? The questions I hear include “can you keep critical pricing information on-premises, integrating with a cloud-based CRM tool?” and “can you make it seamless?”. Required technologies include SaaS integration technologies, such as that offered by Cast Iron Systems, and Single-Sign On technologies, such as Salesforce.com’s delegated LDAP integration.

Mobility
I will save discussion about mobility for a future article. We need to think about the mobile sales force. They are using handheld smart phones, laptops and yes, tablet PC’s. Internet access, such as 3G is becoming more prevalent.

What tools do your salespeople prefer and why?

I was catching up on my RSS feeds and I came across this excellent article by Professor Ford: http://professorford.com/2009/09/23/building-accountability-without-authority/

Many in the pricing profession are faced with a situation where they are trying to influence behavior without having direct authority over those who make the decisions. This article addresses the point head-on, with an example from the NCAA. Performance measurement and peer pressure are two ways to influence human behavior and accountability. Do you have the tools you need to increase accountability?

With the success of PROS’ Global Leadership Seminar Series along its stop in Shanghai, China, Robert Rutledge, who leads Accenture’s Pricing & Profit Optimization practice in Asia-Pacific noted, “Manufacturers in China today face low-cost competition from places like India and Mexico and design and engineering competition from Japan and the west.”  The seminar focused on the tremendous opportunity for manufacturers in China and across Asia-Pacific to adopt advanced pricing strategies and price optimization software to remain competitive and profitable in an increasingly global manufacturing landscape. Mr. Rutledge continued, “In order for Chinese manufacturers to maintain their competitive edge, they will increasingly turn to more robust pricing strategies such as those supported by PROS’ industry-leading price optimization software tools.”

Below are two video clips of Mr. Rutledge’s presentation which the discuss the topic of Cost Plus as well as a Case Study focusing on how Chinese manufacturers can evolve from basic to more sophisticated pricing models, including pricing strategies in manufacturing and a compare and contrast with other Asian countries.

True, leading-edge companies already have this figured out as they are investing in pricing for the long-haul. They are looking at the support mechanisms, training programs, and business policies that must be enacted in order to have a successful pricing initiative. This is not simple and it takes various business units agreeing to change for the mutual benefit of the company. After all, if it were simple, the company would have already figured it out and pricing would not have the immense returns that we have seen time and time again.

Have you considered how performance management and price optimization are related? Performance management is a technique used by many executives to manage both behaviors and results. Pricing has behavioral implications for your customers and your sales managers. The changes in behavior resulting from pricing policies, internal and external, can have a large impact on your bottom line if managed properly.

PROS is an active member of the Professional Pricing Society and Doug Fuehne, VP, PROS, will be presenting a live webinar on this topic in cooperation with PPS on October 6th at 12:00 noon EST.  For more information check the PROS webinar calendar: http://www.prospricing.com/webinars/

Webinars are for PPS members only, however Pricing Leadership blog readers can use the below special registration to attend the webinar even if you are not a PPS member: https://www1.gotomeeting.com/register/900702721

One more thing…did you ever take a PROS Pricing Excellence Certification Course? If you did, you now have the opportunity to transfer these credits to the Certified Pricing Professional program from the Professional Pricing Society. Contact PROS at info@prospricing.com to request a credit transfer.

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Pricing science is often an over-used term. True pricing science is the use of fundamental scientific methodologies and logic that help companies attain remarkable returns on their investment. These algorithms are cutting edge, but still rely on fundamental principles that can be traced back through history.

In 1906, Sir Francis Galton (widely known for his infamous eugenics research and responsible for the term “reversion to the mean”) visited a livestock fair where commoners were asked to guess the weight of an ox. There were 800 guesses at its weight – and Galton recorded each meticulously. Nobody guessed the ox’s weight correctly and many were quite off — so Galton used this fact to try and prove that commoners cannot be relied upon to make important decisions (e.g. voting in elections). Interestingly enough, the average guess was almost dead on – the ox weighed 1,198 pounds while the average was 1,197 (source: NOVA Science NOW aired on PBS).

Here’s the important point — each individual has a unique perspective that added to the entire group’s collective intelligence. Your sales force, pricers and negotiators aren’t that different from the crowd at the livestock show over 100 years ago. As they negotiate deals and make important pricing decisions, they bring their unique understanding of the marketplace. Each transaction adds information about what the market is doing, where it’s going, how much your brand is worth and how much people are willing to pay for your products. Hidden in your transactional data, lies the collective conscious of the market as well as the comprehensive expertise of your sales force.

PROS helps B2B companies around the world mine their data and capture this collective conscious. Do you have a fleet of negotiators or sales personnel with the ability to set price? If so, it may be time to mine your transactional data to truly learn what the market is telling you about the price of your products – or in the good old days, the weight of an ox.

Houston, Texas – August 13, 2009 — PROS (NYSE: PRO), the world leader in B2B pricing and revenue optimization science and software, today announced that it has received a “Positive” rating in Gartner’s 2009 MarketScope for Price Optimization and Management Software for B2B.  PROS has the largest full-time staff and greatest total annual revenue in the industry, making PROS the clear leader in the pricing software space.

“Where many of our competitors have reduced full-time headcount over the last year, PROS remained consistently strong,” said Andres Reiner, EVP, PROS.  “PROS has the advantage given our industry leading commitment to R&D at 25% of annual revenue, our proven ability to successfully deploy pricing software in N. America, Europe, and Asia, and the largest pricing science team in the industry.  PROS is well positioned to capitalize on our track record as the only publicly traded and profitable pricing software company and leader in B2B manufacturing, distribution, and services price optimization.” 

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Houston, Texas – August 11, 2009 — MSC Industrial Direct Co. Inc, one of the nation’s largest providers of industrial supplies and equipment, has selected PROS, the world leader in pricing and revenue optimization science and software, for an enterprise-wide deployment of PROS’ Price Optimization Software.  MSC’s deployment across their 96 branch network includes PROS Scientific Segmentation, PROS Pricing Guidance, PROS Scientific Analytics, PROS Price Optimizer, and PROS Deal Optimizer.

“After an extensive review of all pricing software tools, PROS was selected based on their ease of use, demonstrated speed and success of their implementations, and strong financial track record,” said Charlie Bonomo, CIO, MSC Industrial Direct.  “PROS is the best solution for MSC because PROS could meet our current and long-term needs based on their frequent product releases, ease of upgrade, and the industry’s largest commitment to pricing technology R&D which will deliver improved margins at MSC for many years to come.”

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