For those in the early stages of their investigations, we developed the PROS Online ROI Valuator. Anyone can use the Valuator to generate a high-level estimate of what they could achieve with improved pricing capabilities enabled by a PROS solution. To date, more than 650 B2B companies in manufacturing, distribution and services have used the Valuator to estimate the financial impact of improved pricing and price execution on their businesses. To generate an estimate of value, respondents provide their industry, annual revenue and the pricing capabilities they need to solve their challenges.

Large to small, companies with revenues from more than $5 billion to less than $750 million have engaged the Valuator. While you might expect the results to vary based on the size of the businesses and the areas for which they’re looking for help, results show commonality among the manufacturing, distribution and services companies with these capabilities on most respondents’ wish list:

• Modeling the impact of prices changes before they’re made
• Automating the collection and processing of pricing data
• Profiling and segmenting customers to identify and capture additional business and profits

The Valuator also identified additional high-on-the-list challenges these organizations are attempting to solve:

• Applying segment-based pricing strategies for ‘high-visibility’ products vs. ‘slow-moving’ products
• Streamlining price administration processes
• Standardizing pricing processes and metrics across the enterprise
• Providing sales reps with pricing recommendations to win more often

If you’re wondering what world-class pricing and pricing execution capabilities could be worth to your company, I invite you to use the Valuator to find out. You can receive results on the spot, or we’ll provide a customized report and detailed breakdown of the specific value that adopting pricing best practices could mean to your organization.

Let us know how you size up. While it’s the business we’re in, we’re confident you’ll find it’s worth your time.

Jeff Collins

The conversation goes something like this: Everyone in the industry uses a cost-plus pricing strategy. They won’t give me access to their data. I can’t optimize hundreds of thousands of parts. Blah, blah, blah.

These and other reasons are simply excuses as to why companies cannot optimize their service part prices. I say baloney.

If you knew your customers’ willingness to pay (WTP) for a service part, you could have a huge impact on your company’s profitability and market share. However, determining that exact price can be especially difficult for service parts manufacturers and distributors.

PROS Vice President of Science and Research Dr. Neil Biehn and PROS Strategic Consultant Tim Mohnke collaborated on a white paper titled Determining Willingness-to-Pay Within Reach of Service Parts Companies. In it, they offer insights into why a customer’s willingness-to-pay is independent of the production costs for a service part. Willingness-to-pay is a fundamental concept to understand how to leverage the power the pricing instead of following the industry norm cost-plus strategies like lemmings from a cliff.

I encourage you to download the paper.  Feel free to send me a note or let me know if you have questions or how we can help you add to your knowledge base.

Sean

Other related posts of particular interest:

If you want to understand the pitfalls of cost plus pricing, I recommend Paul Hunt’s reasoning, http://www.pricingleadership.com/why-cost-based-pricing-sucks

If you want another perspective on Willingness-to-Pay, I recommend Patrick Schneidau’s, Myth #4, http://www.pricingleadership.com/yes-you-can-understand-customer-specific-willingness-to-pay

Sometimes these companies really even want to know the answer; sometimes they are just “checking the box” on a decision that’s already made. Those that take the time to do the due diligence are rewarded with a solution that grows and evolves with them at a low TCO. Those that don’t may find themselves years later with an unsustainable solution or a seven-figure upgrade path.  They’re often surprised to find – after contract signing – that their “configurable” solution cannot be upgraded to take advantage of their vendor’s latest and greatest features, at least not without a lot of pain and effort.

So why do many ‘configurable’ systems still have upgrade problems?  First, let’s understand that configurability is important for two reasons:

1) It allows business users to change the application to meet their needs, without the requirement for a development and release cycle; and

2) It allows IT to upgrade the application to the latest technology without the need for services to rewrite custom code.

Undoubtedly, many of the pricing solution providers offer a positive response – and in fact do deliver – on the first item above.

The second point is often the Trojan horse of pricing implementations. So how should you go about doing due diligence on the second? Don’t take my word for it; I am obviously biased. Ask your potential vendor for references that can provide satisfactory answers to these four questions:

1. Can you provide 3 customers that have upgraded a release – start to finish – in less than a month? PROS invites you to speak with our customers about just how painless our upgrade process is. In fact, many accomplish the task in hours, not months.
2. How many of your current customers are on a release you’ve launched in the last 12 months? Companies take frequent upgrades when the effort and cost is minimal. If you find a large percentage of your vendor’s customers are on a release that is more than a year old, you know that upgrades are problematic. Almost 100% of PROS customers are on a release launched in the last 12 months. Speak with them and you’ll hear their experiences firsthand.
3. Can I configure any module of my pricing application or just the “core” without the need for custom code? The entire PROS solution is configurable without the need for custom code – there is no need to ask what is and what isn’t out of bounds. Ask our customers.
4. What is the headcount and budget required to keep the solution sustainable past go live? If your pricing vendor has customers on releases more than two years old – an indication that upgrades are hard – it’s probably due to custom code that prevents the upgrade. That custom code typically requires multiple, full-time IT FTEs or external consultants just to maintain changing business requirements to the system since upgrades aren’t an option. When a system requires this amount of overhead to maintain, you might have a budgetary problem on your hands, once you’ve moved past implementation. PROS customers have minimal IT maintenance budgets because upgrading to the latest technology is easy.  Ask them.

Don’t be fooled by the promises of “configurability.” Find out what it really means to your organization.

If you find yourself with a pricing solution that you can’t upgrade, and you want to explore a transition to a platform that delivers on your needs today and in the future – at minimal cost to your organization – please e-mail me at pschneidau@prospricing.com. I would love to hear from you.

Patrick

As I’ve outlined in my two previous blog posts, the service parts industry continues to be highly competitive around the globe, borne from a series of trends: a weak economy; automakers’ pressures to cut supplier prices; higher costs for raw materials; and increased competition from global providers, in particular China and India. Coupled with the fact that many manufacturers still use market-based pricing strategies – with 75% of services parts not benefitting from optimized pricing – it’s clear a sea change is in order for manufacturers.

So, with these challenges laid at our feet, what are the possibilities? Purpose-built pricing software and scientific analysis.

PROS Strategic Consultant Tim Mohnke has authored a white paper titled Market-Based Pricing With Competitive Data. In it, he offers insights on sophisticated scientific methods and formulas that can be used to calculate optimal target prices for each service part. The scientific analysis and calculations address the anything but “average issue” – pun intended – when attempting to optimize prices in loose competitive situations.

With the pricing innovations specifically outlined in Tim’s whitepaper, service parts manufacturers and distributors will no longer leave money on the table. By contrast, they’ll improve margins and increase their confidence when implementing pricing strategies.

I encourage you to download the paper. Feel free to send me a note or let me know if you have questions or how we can help you add to your knowledge base.

• All sellers DO NOT have products with equivalent value to the buyer;
• Buyers DO NOT have perfect knowledge of the competitive options;
• There is NOT ALWAYS equal power between buyer and seller.

The argument concludes that since these conditions do not hold in B2B markets – and, in fact, all markets – the concepts of elasticity are not valid in real-world negotiations. This is when the chorus of pricers, consultants and vendors declare victory against the existence of elasticity in B2B markets.

First, let me start by saying that I completely agree with the argument above – price elasticity rarely exists in B2B market. But that does not mean that elasticity, in any form, does not exist.

In my blog post on Myth #5, I recounted the story of how my wife and I analyzed and made an offer for our current home. Although we did not apply the ins and outs of the mathematics of elasticity, we used a “back of the envelope” calculation to gauge the likelihood of acceptance of our offer to the seller.  Offer at a low price per square foot and my bid was likely to be rejected or countered. Offer at a high price per square foot and my bid was likely to be accepted. Doesn’t this sound like elasticity to you? Sure, maybe it’s  not the classical definition that you and I learned in business school, but undoubtedly a seller’s willingness to accept a bid changes, based on the price offered.

This is where the academic community has done a woefully poor job  preparing business leaders on  the realities of elasticity in negotiations. Much has been written about and taught on the subject of  price elasticity. Very little research and teaching has been done on win elasticity. Some of the best work in this area was done by Vishal Agrawal and Mark Ferguson in their paper, “Bid Response Models for Customized Pricing” and Robert Phillips book “Pricing and Revenue Optimization.”

For simplicity purposes, let’s define “win elasticity” in this context as the probability of winning a bid at a given price that balances a seller’s desire to make the deal, versus that of decreasing profit from accepting a lower price. Salespeople face this situation every day. Lower your price and be assured of living to negotiate another day. Hold your ground on price and risk losing the deal, even though there is a chance you and your company make more money. What should they do?

Without tools that deliver this type of intelligence, salespeople are forced to use their experiences and intuition to estimate a customer’s willingness to pay. And which direction do you think a new or poorly performing salesperson  tends to lean  if they do not have experience or intuition … lowering their price or holding their ground?

An increasing number of companies have learned to harness the power of the big data within their enterprises to calculate win elasticity and provide their salespeople with better insight and intelligence for their pricing and sales teams. The result is revenue improvements of 3% or more and profit improvements of 15% or more.

How much of your company’s lost revenue and profit are you willing to bet that elasticity does not exist?  And what happens when your competition deploys this type of technology sooner than you?

Which side of the elasticity debate will you be on then?

Patrick Schneidau

In the four scenarios below, I share observations and the common issues of a few simple scenarios I’ve witnessed:

Scenario 1: Equipment, software and personal-care product companies
Pricing in these companies – which focus on quickly delivering new and exciting solutions to a market as a core competency – is typically dictated as a list rate generated by product development or marketing. Sales negotiates the net price using discounts, incentives or rate overrides. Many of these companies have a pricing committee that reviews new product pricing and may also evaluate pricing on big sales opportunities.

The Challenge: In this scenario, one group attempts to articulate the value of their product or service. Ideally, someone has built a business case to justify the investment, based on market value and a price that will be paid. Unfortunately, this isn’t always the case. If there is a known average discount, it may simply be lumped on top of the market-based price to assure no lost-margin opportunity. Over time, flat price increases are added to list prices, and the real meaning behind the price is eventually lost. This only feeds into natural dynamics whereby the sales organization distrusts the product team’s pricing. They must understand the sale and the value of the product or service, which isn’t articulated by the list price, so it goes that management will approve discounting. Many times management does not know what the real market price is, so discount ranges are based on history and margin coverage.

As noted, some of these companies have pricing committees to assure better initial price setting, guidance for sales discounts or to review large-customer deals. The idea goes that representation from across the organization by those who understand pricing will guide better pricing decisions. If a long time passes between funding of a solution and its “go-to-market” timing, pricing should be reevaluated. But, a committee is not the most efficient solution.

Scenario 2: Product-centric, advertising and media companies
Similar to Scenario 1, rates in these companies are set by one team, which may well be a pricing team. The sales team manages net pricing through discounted or negotiated prices, and incentive programs may be created by the team though they may report to marketing, sales, finance or even operations. Ultimately, the final price is still negotiated or adjusted by the sales team or a representative in the field.

The Challenge: This scenario may be viewed as an evolution from the first. Product groups find themselves spending too much time creating price points and responding to bids rather than developing new products. These groups are typically assigned to the periphery of a larger, more influential group, such as marketing, sales or finance – and depending on the group’s focus, decisions will be made from the group’s own business perspective, i.e., a marketing sales or finance bent.

Because pricing is a sub-unit within one of these larger organizations, there also tends to be visibility based on the pricing factors it owns. For example, a pricing team in sales will look at transaction price, rather than through a lens as a holistically understood and managed process.

Scenario 3: Telecom switching, oil-field services, major construction projects, engineered pipeline maintenance and services companies that manage big projects or highly configured solutions.
Pricing in this scenario is developed on a bid-by-bid basis by sales, and cost-threshold coverage is dictated by either a financial or operations organization. A pricing committee may also be common. While there may be a pricing team, the role of pricing is often more tactical and may focus on bid support or understanding costs. The pricing team may report to sales, finance or operations.

The Challenge: In this scenario, product or service costs are typically substantial, based on complex solutions, and complex and time-consuming deliveries. These companies are dominated by brilliant engineers and tech-savvy individuals who focus on operational efficiency, project management and managing costs. These companies are successful because they had a solution to a problem no one could solve or efficiently deliver.

It reminds me of this old quote: “Nothing fails like success.” Once in business, many fail to understand the customers and markets that made them great. The original owners may have had insight or perhaps simply got lucky. The operational delivery engines they mastered are not as understanding of customer needs and what customers value. They solve problems without an orientation toward evaluating real worth.

Despite their process orientation, it never ceases to amaze me that they haven’t thought about pricing as a managed process. They understand sales, billing, budgeting and operational processes, but simply haven’t thought about pricing as an economic process where supply and demand can be evaluated using data. There is no comprehension that pricing can and should be treated as a sustainable and repeatable process.

Scenario 4: Consumer or governmentally regulated companies such as phone companies.
Pricing in this scenario is dictated by a financial organization. While pricing may in their titles, their role is to create rates. The sales team is to sell only at these rates, but deals are still made or price concessions given via free product and other marketing efforts. In these companies, executive management has come up through the finance organization, where the focus has been on financial tracking and cost control.

Only a few simple scenarios are used here to give the gist of what I have witnessed. There are, in reality, many variations, and each would be interesting to ponder. However, these would only be a distraction to the key ideas being shared.

The Challenge: In this scenario, the finance team is responsible for pricing, with a focus on profit delivery. With all due respect, finance folks are best at cost control, building financial models and running efficient operations. I have known many great finance professionals who successfully ventured into pricing roles, and, if you ask them, there is a definitive difference in their perspectives. First and foremost, they view price as a revenue driver – profit is what remains when needs are met at the highest price customers will pay relative to the cost of delivery. There is acceptance that price is dictated by an assessment of prospective clients, based on value relative to competition.

In organizations where finance hasn’t embraced the marketing side of pricing, the finance team focuses on cost factors and margins, and fails to capitalize on the market and economic drivers of price. In other words, by focusing on cost, the company can lose revenue through lost deals and money left on the table by achieving a margin less than the customer would have paid.

Many finance organizations don’t think of pricing as an applied process; instead, it’s viewed as a series of events that drive P&L numbers.

In Summary
We observed the following in all of these scenarios:

Pricing is not an end-to-end process managed with a singular focus.

1. Pricing is not an end-to-end process managed with a singular focus.
2. No one person or team is fully accountable.
3. Pricing decisions can and do become politicized.
4. Net customer pricing becomes inconsistent, with no intelligible logic as to why one customer received one price while another received a different one, which opens opening the door to litigation and lost customers.
5. Focus is on cost coverage and margins.

In these scenarios, pricing isn’t treated as a single process that can and should be managed with a focus toward customers will pay versus what the competitors charge.

I have yet to observe the ideal corporate structure. But, in the ideal world, I would look to a corporate officer who is accountable for understanding and capturing the market values for the company’s offer, grounded in competitive intelligence and solid business sense. This executive’s team would support product development in its business-case creation; drive sales confidence by understanding realistic price ranges for negotiations; and be an ally of the financial team in its quest to drive profits. The ideal pricing team would manage price forecasting and price segmentation, and analyze pricing, markets, customers and financial indicators like there is no tomorrow. The team would implement and manage the tactical and the strategic elements of pricing with a system – invested in by the company – to do all of this.

A pricing mandate is worthy of an executive who is accountable for it, prior to escalation to the Chief Executive Officer. The executive and his team with this mandate must have the authority to pursue pricing without other distracting issues. This is different from sales, marketing, operations or finance directives. It is support for the successful delivery of all other mandates, with a separate focus that requires a disciplined obligation of its own.

The question remains about whether there need to be a Chief Pricing Officer or a formal pricing team that owns the entire pricing process from end to end. Perhaps. I believe there would be a far greater likelihood of getting pricing right. But, the right answer is that whatever your organizational structure, make sure your business actually has one individual accountable for the whole pricing process, without that individual being the CEO. And make sure this pricing-process owner has the full support of the senior executive team to make the unpopular decisions the market’s pricing will dictate.

I’m sure many readers have their own experiences. I welcome your thoughts and ideas.

Patrick Taylor

In PROS newest product release, PPSS 3.21, we upgraded our analytics stack to include support for Microsoft SQL Server 2012, which includes a new in-memory storage option called x-Velocity. This option offers customers the ability to store large amounts of OLAP-style data in a column-based memory cache to greatly improve performance of user queries. The column store is a clever approach to compressing data, since typically data in a column is similar in format.

What does this mean to you?  If you utilize this x-Velocity option, with the DAX querying language, you could see query performance improvements as high as 10x to 100X. That’s right. 10x to 100x. In our testing at PROS, we saw examples of queries returning in 1/100th of the time compared with SQL 2008 R2 cubes.

In-memory is just one component of a Big Data strategy. The ability to reduce server workloads allows us to get even more performance from the same hardware, with bigger data sets and larger numbers of concurrent users.

Microsoft isn’t the only company using column-storage to improve performance. In fact, SAP has made major investments as part of its HANA technology. We’ll be talking about that in future posts as we continue our research.

How are your efforts going with Big Data?  What challenges are you running into?

John Salch

Reason 1:  Cost based pricing limits your ability to price to different segments of the market.  Think about these two examples; the last sporting event you went to and your SEO strategy. In the case of the sporting event, ticket prices vary based on the view you get of the game. The cost to install a seat, serve a customer and the game itself don’t change whether you are at game level or up in the nosebleeds, but you certainly pay more to sit up close because it is perceived to be a better, more valuable seat. In the case of SEO, it doesn’t cost Google more to place your key words near the top of the list, but you pay more for a higher position if you value higher visibility of your key words. Both of these examples have something in common; pricing is about capturing as much of the demand curve as possible. In each example the customer base can be segmented by its willingness to pay. There are multiple offers, each at different prices based on what people are willing to pay, not based on the cost of the offer. By setting a variety of prices based on how different customer segments value your offer you capture a greater portion of the market, maximizing revenue at each point on the demand curve.

Reason 2:  Customers don’t care about your costs, they care about the product attributes they value. In the Smartphone market, do customers really think about what it costs the manufacturer to produce a phone? Do customers consider what the wireless carrier is paying to carry Blackberry, iPhone or various Android phones? The answer is typically no. Customers focus on the product attributes that they value; data capabilities, network coverage, apps, screen size, touch screen vs. keyboard, etc. Customers will be willing to pay more for a phone that has the features that best meet their needs regardless of the manufacturing costs. If a customer’s willingness to pay is not based on the cost of goods, your price shouldn’t be either.

Reason 3:  Unrealized revenue and profit can be substantial.  A tire manufacturer developed a more durable, longer lasting tire. If a cost-based pricing strategy had been implemented the manufacturer would have set prices about 10% higher than competitive products reflecting the higher cost of materials required for added durability. This would have resulted in the manufacturer missing out on millions in profit, because the price would have been 10% higher but durability was 100% better than competitive tires. The manufacturer would have missed out on capturing the true value of the tire. To capture that premium the tire manufacturer developed an innovative pricing strategy. Historically, customers expected tires to be priced based on size; tires that are the same size should be about the same price. A 10% price premium would not have been received well by customers without realizing the benefits of the added durability. To avoid losing out on sales and profit, the manufacturer avoided a cost-based strategy and used a pay-per-landing model. This created a situation where the new tire could not simply be compared to competitive products based on size and price, and customers felt they were getting better value paying per landing. The customers realized the benefit of the additional landings they could get out of each set of tires. The manufacturer achieved close to a 100% premium over competitive tires resulting in significantly higher profits than a cost-based strategy would have generated.

The impact of a smart pricing strategy will show up on your bottom line.  Spend the time to price based on value and avoid the easy trap of cost-based pricing.  It will pay off in the long run.

Paul Hunt

(Editor’s Note: Paul Hunt’s post originally appeared in the Financial Post: http://natpo.st/IWqECY. We have his permission to use the post on our blog.)

As promised in my first post, I want to delve further into the details of market-based pricing strategies and its drawbacks, as well as cover more accurate methods for price optimization. In an analysis of price data for 1,235 services parts, results indicate that more than 75% were sub-optimally priced when using a market-based pricing strategy.  It’s pretty straightforward to know, then, that companies are leaving money on the table in negotiations, which calls for a new approach to competitive or market-based pricing strategies.

A market-based pricing strategy uses competitors’ prices, coupled with a percentage differential, to generate a price.  As noted in my previous post, one of the difficulties, in addition to mining competitive data and discount practices, is applying strategy to the appropriate competitive situation.

Paris is lovely and the weather is great …

The weather in Paris is lovely, and it hardly ever rains there. By contrast, it nearly always rains in London.  Paris has more dry days each year than London – a lot more. But by checking my international weather database, I have found some interesting figures. The average annual rainfall in Paris is almost three times as high as in London.

So by visiting London, you actually escape the rain, even though it seems like it rains there every day. It sounds like a paradox:  Paris has almost three times as much rain as London, but London is much rainier than Paris. The answer is simple. In Paris when it rains, it pours – unlike the constant drizzle that falls in London.  The same contrast exists when calculating a market-based price. Oh, how averages can be misleading.

There are two terms for describing competitive situations for service parts competition: tight vs. loose. Tight competition suggests that when plotting prices for similar parts there is a “tight” range, or narrow histogram. ”Loose” competition occurs when prices are spread over a very broad distribution or “loose” range, creating a wide histogram. In loose competitive situations, a market-based price is not a reliable indicator of the optimal price.

Is that to say market-based strategies can calculate optimal prices in tightly competitive markets?  Theoretically, that’s true, but it is critical to understand the competitive situation for the entire service parts portfolio, not just a single part. The analysis cited above found that 77% offered competitive prices that were too broad and experienced “loose” competitive situations. They were, therefore, sub-optimally priced. With the skepticism outlined in my first blog – and considering only a small percentage of the service parts portfolio may exist in a tight competitive situation – I am confident a different approach is needed.

Stay tuned!

Sean Duclaux

Pricing continues to make inroads in both large organizations and mid-sized companies.  It’s good we’ve left the time when pricing was hidden under finance or totally ignored in Fortune 500 companies. Thanks to the help from the Professional Pricing Society, from pricing optimization software companies such as PROS and from consulting firms, we see more and more companies embrace pricing as a science.

Despite this good news, we know thousands of companies, entire industries and armies of managers still ignore pricing as a profitability lever and a full-fledged element of the marketing mix. Our research shows that most of these are mid-market companies. But what exactly is in the mid-sized market? How do you define it? What are the specific pricing needs of these companies?

A recent study by University of South Florida reported the vast opportunity for pricing is in the small- and mid-sized market (see chart below). There are more than 350,000 companies listed in this category, and chances are that pricing is under-represented, under-utilized and neglected. Our 2010 qualitative research with 15 small and medium industrial firms showed that 11 out of 15 firms didn’t have a pricing function, didn’t formally manage pricing; and applied “bricolage” when dealing with pricing issues.

In essence, the opportunity offers both excitement and challenges. The challenge is to reach these companies that haven’t started a pricing initiative and to convince them  — one by one — to embark on the pricing revolution. The real challenge is somewhere else though. These companies do have a very different set of needs. It requires a different sales technique than a traditional enterprise sales approach. They respond to different factors and display unique buying behaviors.

In the mind map below, we list eight of these unique needs. Some are standard and could be applied to larger firms as well: Collaborative, focused, flexible and responsive. Others are rather specific to the nature of these firms. Let’s take a look.

A critical element of the pricing offering to mid-sized companies is scalability. Because of their size — or whether they’re divisions or stand-alone companies — they may prefer to implement pricing solutions in modules or “chunks” and welcome a scalable offering. Scalability also means a cost spread over a potentially longer period of time, thus avoiding a one-time profit impact that includes operational expenses and depreciations. A scalable pricing solution might be required for availability-on-demand when the business and its people are ready: on-demand analytics, on-demand training and on-demand support.

A second critical element is the virtual dimension of the offering. To avoid large implementations, mid-sized firms may prefer cloud-based software using a SaaS platform. Recent successes by SaaS-based software companies indicate the future of pricing may also be in this growing technology segment. Virtual means, therefore, web-based, easy-to-use, and without the requirement of a massive implementation with potentially expensive consultants. Last but not least, the pricing solution needs to be right-sized. The scale and scope of these offerings should be realistic, stripped of unnecessary fixed costs and demonstrate a real impact to mid-sized firms’ bottom line.

Current mid-market pricing software and price consulting offerings must adapt to the nature and needs of the mid-market. It is worth the investments in specific methodologies, approaches, technologies and business models.

Be bold! Join the pricing revolution and embark on the journey to pricing excellence!

Vern Lennon

Stephan Liozu