Price-volume elasticity is a concept about demand elasticity that’s commonly taught in B-school. The key word here is concept — it isn’t a law (like the law of gravity) — and the entire precept of price-volume elasticity doesn’t apply to the service parts industry. The reason for this is that price-volume elasticity is a retail-focused concept. It doesn’t apply in B2B service parts because, in service parts, volume is driven by repair events, which occur completely independent of price.

The best way to understand the nuances of why price-volume elasticity doesn’t apply to service parts is with an example. Last week I made a trip to the grocery store to pick up a few things. When I got there, I saw that oranges were on sale, 20 for a dollar. Because of this great deal, I began to consider different options of how I might use them. Hmmm … maybe I will make orange-peeled chicken tonight or maybe I’ll try to make fresh squeezed orange juice. I bought 20 oranges, even though I hadn’t even considered buying oranges before going to the store. In this case, price stimulated demand.

However, those in service parts organizations are not able to generate demand due to price, because a change in price will not affect the number of repair events that occur. This doesn’t mean that price isn’t a factor, only that price cannot stimulate overall demand. Customers purchase because they have a need – their car needs a new transmission, or they need to replace their shocks. In addition, they consider how well your company satisfies that need with factors such as quality, service levels, response times, etc. All of these factors influence the price customers are willing to pay. Because customers assess your offering with a bundle of attributes – such as quality, service levels, etc. –, they do not necessarily think in terms of the price-volume elasticity line where lowering a price causes someone to buy more.

Lowering your price doesn’t necessarily steal business from a competitor who has a good relationship with a customer, and raising a price doesn’t necessarily lose business. At some point, this happens, but it cannot be represented with the same clear linear function that displays the concept of price-volume demand elasticity. Instead, it is more of a stair-step function. For example: A hospital purchaser always buys surgical gloves from the same medical supplier and tolerates some price increases because the provider always delivers shipments on-time, and there is a good relationship between both parties. The purchaser might ignore the first few price increases and still order the same amount of gloves to fulfill his needs. However, after several small price increases over time, the purchaser will eventually consider taking his business elsewhere and give another supplier the chance to prove themselves. If you are the original supplier, you wake up one day, decide to do another small price increase like you’ve done successfully many times before, and WHAM!, you’ve suddenly lost a big chunk of business. If you were to analyze your price change history, you will see many small price increases that resulted in no loss of volume and then the one small price increase that caused you to lose the volume of an entire customer… in other words, there was a tipping point where you would either win or lose the entire book of business from that customer. This is called the win-rate elasticity.

The point is that price-volume elasticity treats price as the primary mover of demand. Win-rate elasticity, however, takes into account that there are multiple attributes a customer – or group of customers – will value over other customers. By using these attributes, win-rate elasticity identifies how much additional incentive a customer needs to have – in the form of lowering or raising price – to shift their business to another provider.

I have the honor of working with a team of more than two dozen scientists who devote themselves to pricing problems every day. That team is led by Neil Biehn, Ph.D., vice president and leader of the science and research group at PROS who once gave me the following advice: “Don’t mistake the signal that part volumes are telling you – instead, use them to find out why you’ve won the business.” For further information on the concept of win-rate elasticity within service parts, you can download the whitepaper that Neil and I co-authored, titled “The Critical Variable in Service Parts Pricing: Understanding Willingness-to-Pay” here.

A great way to tighten the relationship with your customer is to use alternative pricing by changing your pricing parameters – deal or customer specifically. Pricing parameter refers to the parameters your company uses to price its products and services — ‘EUR/piece’, ‘EUR/Ton,’ ‘EUR / Liter.’ In the long run, you might find your alternative pricing shifting to become the standard.

The situation becomes most fruitful if you manage to price your products and services so they align with the business logic of your customer. When your customer makes money, you make money. It’s an ideal situation and a win – win for all parties.

Another benefit of alternative pricing is that it helps to create longstanding contracts where you are guaranteed longer-term business and recurring revenue, rather than just selling one piece or one ton of products. With innovative long-term contracts, your customers can then either link cost bases more efficiently to the revenue, or simply be able to more successfully control and forecast costs.

Altering the pricing parameter may also be a part of a bigger move in your company’s operation. The company may start bundling products and services together and price them as one service. This may also mean a larger move in the value chain, where your company takes over a critical component of the process in providing the product or service for the end customer.

Alternative pricing success stories

Many of these examples are not anymore “alternative” at this point, but have become the de facto way a company offers its products. For example:

• Information and Communications Technology (ICT) companies offer a mix of hardware, software and services. Alternative or new pricing parameters are often related to the usage of the whole system, instead of paying once for the hardware or software functionality. Customers are happy as they pay only for the features they really need. The pricing parameter is then for example ‘EUR/times used’ or ‘EUR/user,’ instead of ‘EUR/software license’ or ‘EUR/installed box of hardware.’ Strict requests for quote processes and definitions are also pushing many vendors to find new, long-term methods for making their companies more profitable. Alternative pricing can help there, as the customer potentially discovers the need for new features or new user groups during project implementation.
• Software companies add a time-based component to their price, which changes a software pricing parameter from a perpetual license (valid forever) to a term license (valid for a certain time) or even renting the whole software solution (Software as a Service or SaaS). In each of these examples, customers gain greater flexibility, and SaaS removes individual hardware and installation costs.
• One of the major telecom operators in India purchases its telecommunications equipment – the network that carries your mobile phone calls – as ‘USD per Erlang.’ An Erlang is how much voice traffic is carried in one hour. Rather than the operator separately purchasing telecommunication base stations, software and implementation services, this pricing parameter links the cost of the network to the revenue of the operator, assuming that the revenue stays as ‘price per minute’ for the mobile phone user.
• An IT hosting service provider charges the customer based on time used on each of the hosted servers. Customers benefit because they don’t need to buy, install and maintain servers, and they’re able to gain fast connectivity and global usability of a system in hours or just a few days, and for as long as they require the server. Customers also gain greater operational flexibility since they only pay for time used on the hosted server. The software they use can be stored on the server, providing the hosting provider a long-term business with its customer, and customers gain fast access with reduced capital expenditures on hardware and software.
• A chemical company that sells cleaning supplies prices its products as a yearly fee for the customer, instead of traditionally pricing products on a per liter basis. The company offers an additional comprehensive cleaning service. This way, the customer can either predict the chemical cost very precisely, or simply outsource the whole cleaning job.
• A photocopier company charges its customers per copy, not per liter of ink filled or number of maintenance visits. This creates predictable pricing for the customers’ copy costs.
• A ship service company provides life-raft rental services at a fixed annual price. This avoids the added cost and hassle of sending the rafts to service, paying for each inspection and reparation, and delaying the ship’s departure. The service offers cost predictability and time savings for the shipping company, and consistent business for the service company.
• Internet service providers are changing the way songs and movies are priced. Spotify prices music as a monthly subscription, and Netflix does the same for movies and TV programs. Both organizations offer free 30-day trials for testing. Trial users easily transition into customers, as the monthly fees are quite reasonable and are billed automatically to a credit card.
• In Finland, a TV channel is selling unpublished episodes of a popular TV series on the Internet, priced as ‘EUR/episode’ while old episodes are free to watch. This is an alternative way the station gains additional revenue where income traditionally had only come from advertisements.
• Car service companies make all-inclusive service deals with customers, instead of their customers separately paying for each service. This creates a happy customer who has a predictable cost and a functioning car. The car service company gains the additional benefit of adding a loyal customer to its books.
• A pump company prices its pumps as ‘hours of pump operation’ instead of the traditional price for ‘EUR/pump’ plus the maintenance costs.
• A chemical company traditionally prices its paint as ‘EUR/kg’ and car manufacturers handle the paint work. The company manages to move up the value chain, the chemical company begins running the paint shops, and they now price the service as on a per car basis, becoming an integral part of the car manufacturing line.

When alternative pricing isn’t ideal …

There are examples from ICT companies – and other industries – that created new pricing parameters, and customers did not respond well. In the ICT cases, pricing parameters were designed by the vendor and combined several different real-life metrics. The customers did not really understand these virtually created parameters, and it was difficult to forecast their outcome. In the end, the companies were forced to change to simpler and easier-to-forecast parameters.

What does a company need when changing the pricing parameters?

• Clear guidelines and processes to implement pricing parameter changes
• Proper approval mechanisms
• A comprehensive understanding of the customer’s business to forecast how the new parameters respond in different situations
• Pricing professionals who are able to analyze the outcome of the pricing parameter changes and implement the changes in practice
• Tools to manage the pricing parameter changes efficiently, and analyze revenue and profitability in real time, whether it’s per customer, per product or per service. Poorly chosen pricing parameters can become a big risk if they spread across the organization, and a company doesn’t have proper tools to analyze the situation and respond quickly with counter moves.
• Internal processes for follow up on the parameters and billing
• Contractual commitment with the customer to pay as agreed, with well-defined parameters and metrics
• Access to customer systems or premises to potentially track the agreed parameters. Sometimes the tracking can be automated, but physical access may still be needed.

Final thoughts

With a well-planned and controlled alternative pricing plan, you can get very close to your customer and ensure a steadfast partnership. In the best-case scenario, you can integrate yourself into the value chain of your customer’s business and improve the profitability of both companies.

Further reading

For other pricing enthusiasts, I warmly recommend picking up Innovation in Pricing, Contemporary Theories and Best Practices, published in 2013 by Andreas Hinterhuber and Stephan Liozu.

I’d love to hear your feedback. Have you used alternative pricing? What is the most creative pricing trigger you have seen or used? Send me a note here so we can keep the pricing discussion going!

With the economic downturn clearly in the aerospace industry’s jet wash, executives are hopeful about its future. Forecasts show that the industry is taking off with nothing but clear skies ahead. The sector is expected to grow at a greater than 5% 5-year CAGR, with a predicted market value of over $1 trillion by the end of 2014.

While the industry soars, business and technical challenges in aircraft manufacturing keep many original equipment manufacturers (OEMs) focused on production at the expense of what is typically the most profitable side of the business — aftermarket parts. OEMs often choose to spend time and effort in other areas, such as improving customer service, rather than focusing on parts management which offers significant pricing power.

These OEM executives tend to overlook aftermarket pricing opportunities, typically because their aftermarket parts business is already very profitable. But once they turn their attention to pricing management, they usually find the insight that big data provides is quite powerful.  Smarter, more sophisticated aftermarket parts management and pricing can help tap latent profitability, and leverage power to achieve significantly higher profits.

To re-examine your aftermarket parts pricing and strategy, I suggest reviewing the following executive insights and profitability benchmarks included in this Deloitte white paper, Driving Profitability Through Aftermarket Pricing.  A closer look will reveal the true, troubling picture — an illustration that a significant portion of your parts portfolio falls below expected margins. By remaining focused on the aftermarket parts business, you can maximize your market power and continue gaining altitude to reach your final destination.

The worldwide service parts original equipment and aftermarket industries remain an economic force, and companies continue to search for ways to positively influence margins. To become leaner and more efficient, these organizations capitalize heavily in enterprise application software to automate, improve and measure their business functions and processes. There is little doubt that these investments contribute to increased business productivity and reduced overall cost. Research suggests there is still a great deal of strategic leverage worth exploring in service parts pricing.

The technology environment continues to change at a dizzying pace with growing competitive intensity in the service parts and aftermarket industries, accompanied by a shift in power to customers, who are more connected and well-informed than ever before. Warren Buffet — a man who knows a thing or two about investing — said that, “The single most important decision in evaluating a business is pricing power.” This point is further reinforced by PROS Chief Innovation Officer Craig Zawada in his webinar, The Case for Pricing Software in the Service Parts Industry. Zawada provides clarity about using pricing software to navigate today’s increasingly complicated pricing environment and its amplified pricing pressures.

Service parts and aftermarket pricing decisions are complex, often stretching across organizational boundaries with far-reaching implications in marketing, finance, and sales. Silos continue to exist between service parts pricing management, which is largely disconnected from other relevant business processes. This environment makes it extremely difficult for strategic pricing decision-making to cross business networks and span multiple functions.

PROS and Microsoft recognize that the full potential of a high-performance pricing solution can be more fully realized when the power of advanced science-based pricing is made as approachable as possible to all users.  In this newly available white paper, PROS and Microsoft technologies are on display to provide customers with the powerful combination of the two companies’ key strengths: PROS scientific, dynamic and feature-rich big data solutions, and Microsoft’s ubiquitous, easy-to-use productivity tools.

One of the great privileges in working with customers is making a difference in their success. On occasion we run into naysayers who can’t believe we can help their sales teams by providing more realistic prices while they’re out in the field making calls. They’re fearful of losing the personal relationship side of selling and are doubtful software can show them how to set prices.

And then they find out what is possible. The game is on.

My customer – a large U.K.-based distributor with more than $1 billion in revenue – faced a critical problem. Their generic list prices were too high. Sales teams consistently offered discounts on every product they sold. They didn’t have a frame of reference for how much was too much discounting. Fearful of losing customers due to high prices, they were losing margin because they didn’t have knowledge of what their customers were really willing to pay.

This is where PROS came in. We first identified the driving factors to segment similar customers, products and transactions. An intuitive example would be that customers in the same geographic location would be willing to pay the same price for a product. PROS science engine was able to look into heuristic data to explore many more defining factors – such as customer loyalty, service locations and discounting programs – that could be used to group similar customers. Using this data, the science then calculated the customer’s willingness to pay for the newly identified segments.

The strategic pricing team now leveraged these new customer segments to set custom list prices. This meant each customer received a list price realistic for their specific segment. Those segments that paid prices based on high service overheads still paid the higher price, and the company did not lose out.

With customer-targeted price lists in place, sales managers didn’t have to discount every product to start. For those products that still needed a discount, the guidance showed a price range similar customers were paying. For prospective customers, PROS guided the sales users with a price based on the buying capacities of similar customers. For products launching for the first time, the data science set guidance based on products within its segment.

The sales teams were hooked on the power of big data. They no longer needed to look at the margins for each sale they made. Instead, they concentrated on the value of the products for the customer. They also realized that the customer’s willingness to pay was the key. This unlocked a plethora of opportunities to explore – targeted campaigns, farming high-performing customers and ensuring the sales team’s ability to identify customers that were causing the company to lose margin.

Even better, with this targeted information, their teams had more time to prospect for new business. It was also easier now to keep existing customers happy, since the pricing guidance changed based on market trends. Turn-around time to address a new customer’s price is now faster, more precise and incredibly easy.

It became clear to them that PROS software had no intention of replacing the human aspect of selling. Rather, it was a guide to help them perform more efficiently. Guidance didn’t mean increased prices either; it means pulling up underperforming customers and ensuring the high-performing customers remain happy.

If there was ever a non-believer, I know they’re converted.  Sales teams do succeed using pricing science.

Have you made up your mind?

In today’s difficult economic environment, it’s commonplace for organizations to consistently review their business operations for three reasons: to make process improvements, to be more competitive in the market, and to be more profitable.

Most companies have been through the cost cutting and strategic procurement processes, and now they’re looking for the next lever to pull. Strategic pricing is gaining momentum as more senior executive leverage the power of pricing.

While it can be challenging to implement a new process, starting a strategic pricing strategy is well worth the effort. Here are a few best practices tips I can offer to start the strategic pricing journey with your company.

GET SUPPORT FROM THE TOP DOWN: It’s essential to have the support of the C-suite. Having the backing of senior executives will help make the change sustainable for the long run. A powerful presentation will help back up your case. My suggestion – use visuals aids to make an impact. A chart is a good eye opener to visually show the impact of a 1% change in price and how it’s relevant to the other improvement levers. This will help in starting the conversation and demonstrate how you can make a strategic pricing plan actionable.

BE PROACTIVE AND SEEK COUNCIL: As I previously mentioned, it’s imperative for businesses to review their practices. Just as importantly, being proactive with your pricing strategy can mean a great deal to your company’s bottom line. Begin dialogue with all of the functional areas related to pricing. They’ll be able to provide many examples of opportunities/issues they have worked through. Remember to include sales in this conversation, as they have close relationships with customers. They can provide insightful opinions about what they believe is needed to be successful. Go into each of these conversations with an open mind, ready to listen.

The most important resource to remember is your customer. The relationship built at this point is valuable as you move forward in the strategic pricing process. You may want to introduce yourself as a customer insight manager as they will be more open to providing you with information than if you present yourself as the strategic pricing manager.

PUT A PROCESS IN PLACE: With all your insights, you’ll want to work on processes and procedures to make sure you’re able to capture the improvements from the changes you make.

• Create a pricing approval process that does not slow down the sales cycle. Ultimately you want to help — not hinder — the process.
• Automate the process as much as possible to limit the need of manual reviews. A monthly or quarterly pricing review with a cross-functional team — including senior executives — will keep the process on track.
• Finally, a pricing council that includes customers and outside representatives will provide additional input on pricing moves made by your competition. The council will also provide insight to the wants and needs of the marketplace.

ASK FOR INTERNAL SUPPORT WHEN NEEDED: This is the point when you’ll need help from your IT department or a consultant who can look at your transactional data. Most companies don’t have all the data stored in a single location, so you’ll need to make sure you’re able to include the following:

• Customer master
• Parts master
• Discount matrix (if applicable)
• Cost data
• Transactional data by line item to identify low-hanging fruit

Among the common data areas to include are the following:

• Spare parts pricing
• Discounting matrix (if one exists)
• Sales by customer
• Sales by territory
• Sales discounting groups
• Sales by product group
• Sales with negative or low margin
• Sales by order type

LET THE DATA LEAD THE WAY: Use the data to create a scatter plot and examine the discount list on the y-axis, and dollar value of the order on the x-axis. Identify areas of opportunity — the outliers — to find quick wins. Some of these outliers will not be actionable and may instead be part of a good will offer from the sales team or other source. These should still be tracked to understand the true profitability of a customer, and the profitability for each sales person. Additionally, looking at the list pricing process by product family will offer additional opportunities.

Now you’re ready to start taking action on the identified opportunities. Remember, small changes will produce big results, so even those small .5% adjustments will keep the senior executive team involved in the process. Getting and keeping the sales team on board with these changes is a must. If the sales leadership team believes in the changes, the rest will follow suit. Creating tools for the sales team including economic value estimation models, perceived and financial value models, and value proposition statements for each market segment, as well for each product, will assist in the adoption process. These tools will also help the sales team move the conversation away from what is my discount to how will the product/service improve my customer’s profitability.

Strategic pricing is a journey, not a sprint. Understanding and proactively using your existing data is a way to be more competitive in the market. Once you have a plan in place, small changes can keep profitability moving in the right direction … up and to the right.

If you’ve driven the Road to Hana in Maui, Hawaii, you know it’s a true adventure. SAP’s new in-memory database platform, known as HANA, promises the same excitement, dangers and serenity at the end of the road. Both the road and the database should not be missed.

And there’s more good news … today we announced that we’ve signed an OEM agreement with SAP to embed the HANA platform with the PROS big data applications for sales effectiveness. You’ll be hearing more about this agreement in the coming weeks and months. With its in-memory analytics, our customers will be the winners with our integration.

There is plenty to read about SAP HANA on the web, so I won’t focus on that.  If you have been living in a cave for the last year, try going here, here and here.

Instead, I will tell you about why the PROS + SAP HANA combination is a recipe to outperform, for outperforming companies.

• First, Big Data is here to stay and you need to embrace it.  Companies that leverage all that information and use it for a competitive advantage will succeed.  Data scientists are working right now to solve hard problems, discover angles to exploit and create advantages that will last.  What value is it to test theories faster?  Can we get results back from experiments in hours rather than days or weeks?  HANA’s in-memory capabilities, as well as built-in algorithms, are the right engine for PROS Big Data apps.  You need answers now.

• Second, Data Science is a weapon that needs to be used, a weapon you need.  It needs to plug into systems of decision, such as ERP and CRM, where the battles are fought and the weapons are needed. SAP has made significant investments to make HANA the platform to run SAP’s business apps. PROS has made significant investments to simplify, automate and power those decisions with data science. The combination of PROS Big Data Science, SAP Apps and SAP HANA is a natural.

• Third, technology is chasing Big Data. What you have today will not make the grade. Think of the technology in automobiles, 10 years ago versus today:  GPS, sleep-avoidance systems, stability and traction control, roadside assistance, hybrid motors, satellite radio and tire pressure monitoring.  Would you drive a car without most of these items? Would you run your business on basic relational databases and data warehouses or other technology from 20 years ago? HANA presents new technology, just invented and unique, that can solve business problems faster. You need it.

PROS is investing to make HANA a supported data platform for our applications. We have first-class support for SAP business systems, including SAP-certified integrations. We are currently integrating HANA and will make it a first-class platform.

Where are you on the “Road to HANA”?

Recently, a sales manager for one of our customers asked me an interesting question:  “What qualifications do you need to be on a pricing team?”

To give you a little background, the sales manager’s company is in the midst of creating a pricing organization for the first time. Given this context, there was not only curiosity, but also a healthy dose of suspicion and apprehension behind his question. His company has been growing steadily and is a leader in many of its markets, all without a pricing organization in place. So why, he wondered, does the company need to create a pricing organization now, and what exactly are the qualities of a good pricing team member?

There are many compelling reasons why companies benefit from having a pricing team in place:

• Provide accountability for improving pricing performance:  When pricing responsibilities are split among multiple functional areas, it is too easy for pricing to become an afterthought. Given the well-documented profit uplift from even a 1% improvement in pricing, the rewards of having one team “own” pricing are significant.  Of course, accountability should go hand-in-hand with defined performance metrics for the pricing organization, which are aligned with the company’s pricing objectives. These could include both outcome metrics like the percentage change in pocket margin or in win rates, and process metrics like the percentage change in cycle time to analyze/quote deals.
• Provide dedicated resources to business unit leaders and sales teams to help them identify opportunities that will close, offers that will sell and prices that will win:  This includes providing sales teams with the tools and actionable, real-time analytical support they need to better position prices and defend value in B2B negotiations.
• Develop internal pricing thought leadership:  Pricing teams can help their companies continuously improve pricing capabilities by inspiring constructive debates around pricing, and sharing their insights on best pricing practices. In some companies pricing team members lead training sessions to help expand pricing knowledge throughout the company.

Given the benefits of creating a best-in-class pricing team, what qualifications should companies consider in identifying and recruiting potential team members? Which qualities best position a company to realize these benefits? What defines a good pricing leader or a good pricing analyst?

Pricing Leader

The pricing leader has primary accountability for driving the company’s pricing improvement initiatives.  He is the chief architect of the company’s strategy for developing pricing excellence, and a visible champion who drives the cultural changes necessary for the company to achieve this strategy.

• He must be able to create and maintain the right sense of urgency around pricing initiatives.  However, in many companies the pricing leader does not have direct authority to make pricing decisions. This may reside with the business unit and/or sales leaders. Therefore, to accomplish the company’s pricing objectives, a good pricing leader must be part diplomat and part sheriff, more influencer than dictator. He must have exceptional leadership and communication skills in order to influence decisions without the benefit of a reporting hierarchy.
• He should have expertise in pricing principles, strategy and techniques, with the ability to be perceived as the company’s pricing thought leader. He must be able to work collaboratively across functional teams and different organizational levels to build consensus and deliver results.

This can be more challenging than it sounds. Several months ago, I had separate discussions with the pricing leader and a sales manager for a large distribution company. The pricing leader was excited about a new pricing review process he had recently implemented to analyze and vet deals submitted to senior management for approval. His intent was sound – to improve price realization – and he had the right players at the table – pricing, sales and senior executives. When I asked him how the sales team was responding, he noted some resistance but assumed it was simply due to sales wanting to protect its turf.

However, when I spoke with the sales manager, he expressed different concerns.  It turns out the pricing team was spending so much time on the detailed analytics that they actually increased the cycle time needed to get deals approved. They were so focused on the pursuit of analytical “perfection” that they ignored the business realities faced by the sales team in competitive situations. It didn’t help that they were using inefficient excel models to perform the analyses. The pricing team had also failed to either communicate the rationale for pricing recommendations to sales, or to arm them with the tools they needed to better position prices and value in their negotiations with customers. Despite the best intentions, this pricing leader was unable to be the influencer his company needed to effectively drive the cultural changes necessary for pricing improvement.

Pricing Analyst

There are several qualities that define a good pricing analyst, and these can be broadly categorized into both strategic and tactical skills necessary for the role:

• On the strategic side, the pricing analyst role requires advanced analytical, critical thinking and strategic thinking skills, with a solid understanding of the various forces that impact marketing and pricing strategy. Good pricing analysts can engage in the big picture thinking needed to re-evaluate pricing strategies given any changes in customer value drivers, product lifecycle, or competitive positioning. They then translate these insights into detailed changes to pricing strategies or target prices at the segment and customer levels.
• On the tactical side, pricing analysts tend to be data-driven and detail-oriented, with a strong penchant towards analytical rigor. They are able to analyze large amounts of quantitative and qualitative data, and distill it into actionable insights and relevant take-aways. They should have a high degree of intellectual curiosity; good pricing analysts spend a lot of time asking “Why?” and “What is the impact if … ?”

Finally, pricing analysts must have strong interpersonal skills, with the ability to be personable yet persuasive. It helps if they have an innate knack for quickly building relationships and credibility. They must also be strong communicators so that they can help others – particularly the sales team –understand the rationale behind pricing recommendations and the impact on profit margins from  negotiated changes to price levers. Pricing team members should be able to understand and address the challenges faced by the sales team. The best analytical abilities in the world won’t be enough to overcome a pricing team that is ineffective in collaborating with sales.

The journey to pricing excellence is not easy. Leading a company along this journey requires exceptional leadership and commitment.  The rewards are well worth the challenge.

What do you consider the most important qualities for a pricing leader or pricing team member?

Spring is a time of renewal — in nature, but also in business. It’s an ideal time to revisit old practices, assess their efficacy and commit to refreshing what might not be helping the long-term interests of your business, including pricing policies and strategies.

Last year pricing made the headlines on several occasions. From Bank of America to Netflix and perhaps the most famous example, J.C. Penney, there’s a lot to be learned from the past year in pricing. To make certain pricing doesn’t fall by the wayside in 2013, here are three pricing commitments (not resolutions) your company should add to its spring cleaning list.

Stop making reactive pricing decisions

Highly reactive pricing decisions increase the likelihood that your organization will become a price taker. When pricing is just a means of satisfying short-term objectives, you may find yourself constantly under pressure to offer deep discounts or risk lost deals and unhappy customers. It’s characteristic of a company stuck at Level 1 or ‘fire fighting’ – a company just setting out on the road to world-class pricing.

So in 2013 make pricing a journey, not a destination. A journey requires planning. First you must decide where you’re going (set pricing targets). Then it’s important to determine how you’ll get there (develop a pricing strategy). Constantly monitor performance indicators to determine where adjustments need to be made, and when faced with obstacles and roadblocks, don’t lose sight of that strategy. After all, the targets, processes and feedback loops are only as effective as you are proactive.

Never underestimate your customers

If one size doesn’t fit all, neither does one price. It’s essential you understand your company’s value proposition in the eyes of different customer groups. Pricing segmentation is truly the backbone of pricing strategy and there are varied approaches — segment by product usage, order urgency or growth potential for starters. Use those groupings to identify high- and low-margin orders and consequently where true growth opportunities lie.

Can we really remember the last year in pricing without mentioning J.C. Penney? The company is an example of what can happen when customers are misunderstood or segments are treated uniformly. In 2012, the retailer put an end to its popular in-store sales and promotional coupons. Instead, the company introduced a three-tier pricing program of everyday prices, monthly values and best prices. It sounds great in theory, but “fair and square” aside, J.C. Penney shoppers felt alienated and confused, and the retailer ended the year -28% in sales during peak season.

Stop compromising on value

It can feel like a vicious cycle if salespeople and employees aren’t committed — or worse yet, don’t see the value in committing — to pricing. After all, pricing performance demands accountability. Be aware of your sales team feeling frustrated, constrained or even burdened by unrealistic sales targets. When it comes to negotiating with customers over price, salespeople must have a clearly defined degree of variation. Although saying no can be difficult, it puts the focus squarely on your value-added offerings.

Consider the alternative: in 2012 there was an explosion of price-match guarantees, causing sales at many brick-and-mortar stores like Best Buy and Barnes & Noble to suffer (although some have shown signs of rebounding). Consider Best Buy for a moment. The company lost sight of what differentiated itself from competitors. With a decline in value-added programs like worry-free repairs and buy-back trade-in programs, no wonder price became the sole differentiator. It’s worth re-emphasizing — stop compromising on your company’s value.

Just remember, when it comes to pricing improvements don’t think of it the same way you do your resolutions to eat healthier. This spring, focus on pricing as an effective leveraging tool for company profitability and you will see measurable results in 2013.

Editor’s Note: Paul Hunt is a contributing writer for Canada’s Financial Post, and this post originally appeared on April 13, 2013.

On March 5, I hosted a webinar with PROS titled “Is It Time to Rethink Your Pricing Strategy & Boost Pricing Power?” During this session, we focused on the need to pay more attention to pricing strategy, especially in light of increased competition and renewed complexity in the business world. The premise of my argument is that now is a good time to rethink your pricing strategy or to purposefully define a pricing strategy if you have not yet done so. If you missed the webinar, you can watch it by clicking here.

If you’re embarking on an organizational transformation of your pricing approach, at some point you’ll need the support of strong, robust and powerful pricing software. Chances are you’ll not be able to manually manage the vast amount of data, manipulations and regressions required to extract critical information and relationships.

The use of spreadsheets and home-grown models might not be sufficient. You will need to deploy best-in-class pricing software to design and leverage a scientific pricing infrastructure. That will be become the scientific backbone of your pricing process, which will be used in both the price setting and the price getting processes. The figure below shows some of the contributions that pricing software can bring to the two dimensions of pricing excellence.

I have been asked many times if a company can reach pricing excellence without pricing software. My answer to this question is no. The highest level of any pricing maturity model requires the adoption and assimilation of advanced optimization software. Best-in-class companies deploy a pricing software solution that interfaces with the rest of the software infrastructure.

Reaching pricing excellence is a journey and not a destination. During that transformation, which can last up to five years, pricing software can become a tremendous resource:

1)    Pricing software acts as your scientific backbone for decision support. The goal is to move away from decision-making processes primarily based on gut and experience, and to incorporate data and science to support pricing decisions.

2)    Pricing software provides across-the-board rationality for confidence building. The science allows the use of historical data to predict future behaviors and to increase the team’s beliefs in higher quality pricing decisions.

3)    Pricing software gives senior executives and champions the right data about the success of the pricing transformation, accompanied by dashboards and project trackers. Most companies operate blindly and do not equip their top leaders with basic pricing KPIs. With the right dashboards, champions can steer the ship in the right direction along the journey.

4)    Pricing software builds strong capabilities with price users and price setters. By using a platform that is structured and systematic, price users and setters learn and integrate new technologies and concepts in a consistent manner.

5)    Pricing software, when probably deployed and assimilated, accelerates the transformation toward pricing excellence. The combination of all these points allows companies to possibly go faster in their transformation, at least on the side of the technical assimilation of pricing science.

On April 16, I will host another webinar with the Professional Pricing Society on behalf of the PROS team titled “The Five Organizational Factors Needed to Achieve Pricing Excellence.”  We will discuss these points in greater details. To register, click here.

Please invite your pricing teams, your marketing and sales peers and your leadership to join for a good presentation and discussion. Pricing software can become a great resource to accelerate and improve your transformation process towards pricing excellence.

Be bold. Join the pricing software revolution!