I was able to attend a High Tech event with Microsoft in February.  They have just released the content and the CIO panel was interesting.  I think it’s worth the time to watch…

http://www.microsoft.com/showcase/en/us/details/2f4c6463-4d68-4fc5-9627-ce4132cd9c36

Watch the CIO Panel Discussion on “Cloud Computing…the New Normal?” from the 2011 Global High Tech Summit moderated by John Halliwell, General Manager – Northwest District, Microsoft with panel members: Sam Coursen, CIO, Freescale Semiconductor, David Smoley, SVP and CIO, Flextronics International, Kevin Cooney,VP & CIO, Xilinx and Jay Kerley, VP and Deputy CIO, Applied Materials.

I read a great article this morning at CFO.com entitled “The Queen of Soul’s Ode to CFOs.”  In this piece by Bud Kulesza, he outlines the top ways in which CFOs can engender trust and respect from their organizations.  One such way is “to work with the rest of the organization to increase understanding of what the ‘numbers’ mean and how to use them to make better business decisions.”  As I read this point, one instance in particular came to mind where better insights could lead to better decisions -  pricing.

I had the privilege of hosting two CFO roundtables earlier this year at the CFO Corporate Performance Management conference. The topic we discussed was the credibility gap between finance and sales when it comes to pricing: finance thinks sales just gives away deals; sales thinks finance is out of touch with the market when it comes to pricing.

Most of the CFOs agreed that one way to close this divide is by finance providing more granular, fact-based insight into historical customer transaction data that reveals not only true customer profitability, but also true customer willingness-to-pay. With this depth of fact-based insights based on irrefutable buying behavior, finance can credibly contribute to “right pricing” for products, customers, and deals. And sales will be more inclined to respect and trust finance for providing useful, timely, and market-relevant data that helps them win more business profitably. CFOs agreed overwhelmingly that this approach would go a long way to close the trust gap with sales.

If you’re interested in learning more about willingness-to-pay, I encourage you to download a whitepaper on this topic written by Dr. Neil Biehn of PROS.

All the best planning and hard work that go into a major corporate pricing project or initiative can be wasted if you don’t manage the change process for your users—especially your sales force.  At PROS, we’ve talked to a number of frustrated companies that have been stymied in their pricing efforts because their sales force didn’t have the confidence in their numbers or their systems.

That’s why PROS sponsored a recent online Professional Pricing Society (PPS) webinar from one of the top pricing professionals in the country, Kristin Daniels, of Cardinal Health.  Kristin shares her experience and lessons learned for successful pricing project adoption in this presentation.   If you’re a PPS member you can check it out here.

Kristin and I have also coauthored a new white paper called, “Change Management in Pricing Projects” that gives you an overview of four key steps every pricing project needs to secure user adoption.  It’s designed to help you get your users to not only adopt but to embrace your pricing project goals and processes. 

One of the most important things to keep in mind is that different audiences in your company need to have pricing messages and examples tailored to issues or problems that are meaningful to them.  That includes your finance department as well as marketing types and sales people. 

Your sales people, in particular, want specific examples of how new pricing methods and technologies are going to make their life easier and more productive.  When introducing new pricing software, for example, Kristin has some great suggestions.

Go for a quick win with fast answers from using the pricing software and then have the ability to dig into more complex analysis.  Break up the sales team into small teams, ideally of 3-4 people.  Give each team a unique problem to solve in the software and 15 minutes to solve it.  Then have a representative from each team come to the front of the room and demonstrate in 5 minutes or less how they found their answer in the software.  Then repeat with at least one more 30 minute round.  This is particularly effective with sales representatives because it forces teamwork, drives competition, ensures participation, and enables three different problems to be shown to the entire group within each 30 minute round.

This paper is filled with these kinds of practical tips you can use in implementing your own pricing project.  I suggest you take a few minutes and download it free.

Last Friday, Bloomberg.com posted an article quoting Warren Buffett on the importance of Pricing Power when evaluating a company’s position.

I totally agree that pricing power is an incredibly valuable thing.  There are a small minority of companies that have this broad-based power as Mr. Buffett talks about.

However, the majority of companies have much more power than they might expect… in The Price Advantage, we put forth the idea that many more companies can make pricing a source of competitive advantage for their business.   For example, most companies have a rich history of pricing transaction data in their systems, but do not use this information to price the next deal that comes by – instead, relying on simple rules, or gut feel. 

Companies can create pricing power.  Leading companies equip their pricing decision makers with sophisticated tools to find the opportunities, and surround those tools with leading edge pricing processes and organizations.  It takes hard work, and good management, but the rewards are quick and substantial.

The Oracle of Omaha made some interesting comments recently when speaking to the Financial Crisis Inquiry Commission.  According to Mr. Buffett, “If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business and if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”¹

Warren Buffett’s key thesis is when you measure the quality of a company – you only need to look at their ability to raise prices and the corresponding market response.  Those companies that have built great branding or niche markets are great companies – with one impressive characteristic – the ability to raise price at will.

Are you selling only niche products with little/no competition?  Is your brand so strong, you can increase prices by 10% across the board without as much as a whimper from your customers?  If you are a B2B Manufacturer, Distributor or Service Provider then the answer is highly unlikely.  That’s because your products, customers and markets aren’t that simple, in fact, they are quite complex. 

Mr. Buffett’s comments probably hold true for some of your products.  There are certain products in your portfolio that your customer base is highly loyal too.  Other products are pure commodities.  Your markets are also complex.  You dominate the market in certain regions, while other geographies represent a challenge logistically and competitively.  In the end, your customers’ willingness-to-pay can change drastically by product, geography, industry and branding – for more information, see The Critical Variable in Pricing: Understanding Willingness-to-Pay in Business-to-Business Marketing.

Can you raise prices by 10% across the board without a prayer session?  Can you use science and fact-based analysis to make the best pricing decisions possible?  Absolutely – and that’s what good businesses do.

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¹Buffett Says Pricing Power More Important Than Good Management, A Frye and Dakin Campbell, Bloomberg, Feb 17th, 2011.

The task of achieving optimal pricing in the automotive and equipment parts industry can be quite challenging. Market-based pricing techniques—even with perfect information about competitor prices — are an attempt to get it right. But, recent research conducted by PROS for a major auto parts manufacturer shows that new automated tools and techniques are required to overcome what can be described as a “market-based pricing credibility gap.”

This gap occurs because current methods of using only competitive data to determine a “market-based” parts price aren’t really up to the task. While the logic of market-based pricing to the average has the advantage of simplicity, according to our research, it’s not the whole story and it doesn’t reflect what happens in the real world.

That means a lot of parts manufacturers and distributors are experiencing far more uncertainty in market-based pricing analysis than they might think.  And, if their pricing analysis is off, it’s likely that they are not optimizing prices for profitability, and may also be wasting money on competitive pricing research.

To close the “market-based pricing credibility gap,” professionals today have to explore new methods of prescriptive pricing for parts that incorporate more comprehensive scientific methods and automation through advances in software technology.

There’s a new white paper that I’ve written aimed specially at this issue in the auto parts/equipment industry.  Download it free

The concept of variant, or component, pricing is familiar to a lot of manufacturers these days, thanks to Dell.  That’s because Dell introduced the concept of variant pricing through its model for customizing the purchase of a personal computer — a big innovation at the time.  When ordering a PC from Dell, for example, the customer selects a base option and then chooses  variations on the base configuration by adding hardware and software components.  By setting a new standard for how consumers purchase a PC—using variant pricing for adding components — Dell rapidly became a market leader in its industry. 

Despite the success of variant pricing among manufacturers, distribution companies have rarely followed suit… and therefore have often missed opportunities to increase customer perceptions of value and capture added profits that variant pricing offers. 

Gaining the ability to set distributor prices by component and associated services, and breaking out different costs for internal reporting and customer communication, are essential to reaping the benefits of variant pricing.  Only when distributor pricing teams and sales forces have the right information at the right time will they be able to make informed decisions, communicate properly with customers, and maximize revenue and profitability. 

It’s not rocket science.  But it does involve scientific analytics and computer software technology to make it possible. You can download a free whitepaper that describes how variant pricing can be applied to the distributor business model.  Plus, it shows you how innovators in distribution are already using variant pricing to increase their competitive position and enhance their profitability.

If you aren’t using Variant Pricing right now, you’re probably leaving money on the table in every deal.

Download the white paper

The term ”Willingness-to-Pay” (WTP) is often used by pricing professionals to discuss the spending limit of customers for products they buy.  The definition of WTP by author Christoph Breidert, a PhD in business and economics, says: 

Willingness-to-Pay is the highest price an individual is willing to accept to pay for some good or service.

Think about it. If you knew each of your customer’s precise “Willingness to Pay” (WTP) for each product, you could simply charge that price. The result would likely be a huge increase in your profit and market share…and maybe a bonus for you.

But, up to now, there’s been a problem with finding the ever-elusive willingness to pay.  Common consumer business pricing techniques typically used to determine WIP don’t apply very well in the business-to-business environment where prices are constantly negotiated.

That’s where your own B2B transaction data and pricing software technology comes in.  Because you can now use automated tools to mine your historical data and literally determine a WTP for every customer and every deal.  A lot of companies are already doing it. You can find out how in a new white paper I’ve written that explains what I’m talking about.  Download it free

Ken Orr at the Cutter Blog writes a great post about Enterprise Dark Matter, or the hidden but very critical applications in the enterprise.

When I talk to customers and prospects, I am seeing these applications come up.

One of the often hidden benefits of moving to a single pricing system is the elimination of these hidden physical systems, often in the form of spreadsheets managed by one critical person.  The systems, and their valuable knowledge, are often incorporated into the pricing system as business rules and automated or semi-automated data feeds.

Having these systems continue as Dark Matter is a risk to your enterprise.

Quoting Ken:

My experience also shows that large organizations rarely face up to the number of dark systems that exist in their systems’ white spaces (or see how critical they are) until there is: (1) some major failure, (2) an urgent desire to replace some core system, or (3) some key person leaves (or dies), and it is discovered that some heretofore unknown system exists that has little or no documentation.

I’d recommend reading Ken’s post, then I’d like to hear your thoughts on this problem.

Understanding the value you provide to your customers is always important when you set prices, but it is even more crucial in commodity product industries.  Take this example of a European chemical manufacturer:

A large customer continued to pressure a sales rep of a chemical commodity products manufacturer for lower prices on a specific product line using “cheaper competition from Asia” as his leverage.  The manufacturer complied with many of these requests because it was a “commodity product” and the manufacturer felt they would lose the business if they did not lower prices. 

A year later, during performance reviews, it became apparent the product line was losing money, so the manufacturer decided to discontinue production.  To everyone’s surprise, once the customer was notified about this decision, the customer went into panic mode saying that their production would be impacted, as the Asian competitors could not provide the same level of product quality or JIT delivery service.  They were now willing to renegotiate the contract.  The end result was a renegotiated contract that included a 20% price increase that kept the product line alive.

In the commodity products industry, a distinction must be made between commodity product and a commodity offer.  While the product may be perceived as the commodity, the offer provides opportunity for differentiation and capitalizing on differentiation via product customization, service levels, product quality, delivery, marketing support, etc.  As evidenced by the story above, it’s essential that commodity products companies understand the value they provide to different customers and differentiate offers for each segment.

The key to optimal pricing decisions is understanding the value that you provide to your customers and then testing those findings in a real market place.  There are many analysis approaches, such as Economic Value Mapping, that intend to determine the value you provide your customers based on surveys, customer interviews, etc. The challenge with these types of approaches especially in commodity industries is that they can be difficult to implement in practice and, because they are static in nature, their results may become quickly outdated.  In most cases, the best answer to the value question lies in your data.  The right approach is to implement tools that (1) mine your data to understand the willingness to pay of different customers for your product and service offerings and (2) provide you a framework to make and evaluate your decisions in an automated fashion to support sustainable optimal pricing processes and decisions.  With pricing optimization tools, you can change the role of your pricing organization from price entry based on gut feel and sparse information to a continuous process of analyzing the business, testing new strategies, evaluating results and implementing across the board.