Chief Pricing Officer

Apologies for the late notice, but you’re not going to want to miss this. Tomorrow, Thursday 9/25 at 9:00 a.m. PT/12:00 p.m. ET, the Professional Pricing Society will host a webinar with guest experts from SignalDemand. Bob Pierce, Ph.D., SignalDemand’s Chief Scientist and Mike Freimer, Ph.D., SignalDemand’s Director of Research and Development will take on your toughest pricing challenges. The SignalDemand “Pricing Doctors” have deep expertise in price optimization for manufacturers, an especially challenging field given today’s volatile markets. Per Sjofors, pricing expert and Managing Partner at Ategna, will also offer his insight on the pricing panel, make sure to check out his blog, Best Practice Pricing.

Participants can submit questions in advance to chris@pricingsociety.com to ensure in-depth analysis of pricing concerns, though I’m told the panel will also respond to questions posed during the webinar.

Register now on the PPS site, before space runs out. 

Pricing technology is definitely not new.

The airlines industry first pioneered pricing strategy with what they called “yield management” – discounting seats on less popular routes and maximizing prices on routes that have a lot of demand. The Professional Pricing Society was established in 1984 as the field began to heat up (check out their blog). The hotel industry got on board in the late 1980s using what was referred to as “sophisticated computer techniques,” followed by retail-specific software technologies.

The manufacturing sector is one of the more recent industries to benefit from price technology, though technologies vary widely across vertical markets such as food, chemicals and consumer packaged goods. As Managing Automation’s Chris Chiappinelli points out, pricing technology for manufacturing has made a lot of progress since the days of scratch paper, gut instinct and spreadsheets:

“For a long time now, the practice of product pricing has involved more art than science, with product managers and sales professionals governed mostly by what ‘felt right.’ In recent years, however, science has started to gain the upper hand, and the sun may be setting on the era of ‘pricing by the gut.’”

As technologies have evolved and fragmented to serve more specific niches, analysts and vendors have struggled to classify different breeds of pricing technology. Some might say the category has had a bit of an identity crisis. Depending on the industry and market, you’ll find price-related software under labels ranging from “yield management” to “merchandise optimization” to “demand and revenue management.”

We’re currently experiencing the next evolution in the sophistication of pricing technologies with the maturation of the Software-as-a-Service (SaaS) delivery model. SaaS makes it possible to offer massively scalable, high-powered number crunching software based on finely-tuned, dynamic algorithms - a major stride compared to the past industry standard of static, rules-based systems that require on-site installation and ongoing customization. I could go on about the benefits of SaaS for price optimization, but I’ll leave that for another post.

The September 2008 edition of The McKinsey Quarterly features an excellent article with six tactics for pricing as costs rise and price sensitivity increases. It is clear that as margins grow ever more narrow, price becomes an even more powerful lever for driving profitability.

The article, Pricing in a downturn, points out the importance of monitoring customer-level profitability. My opinion is that with the right insight, it’s also possible to not only monitor, but manage product-level profitability as well…more on that in another post.

Enjoy.

Now, several things come to mind because of this story, the main being a creeping fear that if 99 Cents Only is raising prices, our economy is truly in trouble. Beyond that, however, is how important a penny – 99/100ths of a penny – is to the chain. It’s almost incomprehensible to think that by raising prices by less than one cent, the store can start to remedy the woes facing its bottom line. But it can. Think about walking into a dollar store, then think about all the items loaded on the shelves, then multiply that by the countless people who file in and out, buying different nick knacks at 277 different stores, then start adding up all those pennies. Pretty soon, they start piling high and, indeed, those pennies make a huge difference.

Price is the most underappreciated and most powerful variable when it comes to improving profitability. Especially in tight economic seasons, companies pinch pennies and scrape to drive efficiencies across all areas of business. Businesses reduce inventory, tighten logistics, streamline and automate operations and get creative about pushing down input costs all along the supply chain. However, it’s no secret that manufacturers across all sectors - especially those in commodities-based markets, from food to plastics and minerals, are running out of ways to counter rising costs and new economic realities.

So what about price?

It should be no secret that price has the most powerful impact on profit. Starting with a study by the Harvard Business Review back in 1992, followed up by McKinsey and Gartner more recently, the research proves the importance of price. Compared with improvements in inventory reduction, unit sales and cost of goods sold, a one percent improvement in price drives an 11 percent improvement in operating profit.
Earlier this summer, a Managing Automation article titled “Is the Price Right?” reported that “[m]anufacturers that take advantage of price management software can reap 10% to 20% margin improvements and a 3% to 10% bump in revenue” according to Noha Tohamy, research director of AMR Research.

Despite its direct impact on margins, price is easily the most neglected aspect of operational infrastructure. So why is price strategy and optimization all too often neglected? That is a topic for another post, coming soon…

As is - unfortunately - too often the case with government economists, Federal Reserve Bank of Atlanta President and CEO Dennis Lockhart told us last week what we already know: Prices are too high.

Lockhard said that food prices have inflated 6.5 percent through the first half of 2008, while motor fuel jumped 32 percent and home utility costs rose 21 percent. According to Lockhart, those three things account for 25 percent of all consumer spending.

There was good news too, as Lockhart also predicted that inflation would ease as the overall sagging market naturally tamps down inflation. But, there’s still only one key takeaway for American manufacturers and consumers: It’s going to cost more to produce things and buy the products made.

The easing of inflation will be a welcome respite for all involved. But, ultimately, it will be like that 90 degree day after it’s been in the 100s for days straight: It’s nice, but still not too comfortable. Inflation, or at least volatility, will be with us for awhile, and price is quickly becoming the new flashpoint for the 21st Century. For manufacturers, smart pricing is essential in an inflated market - finding the correct balance between cost and demand, as supply prices spike, is quickly becoming the most important new business calculus of our time. Companies that have the correct insight into how to properly buy and sell will emerge as the new leaders, while those that don’t will struggle.

That’s an easy side to choose.