Chief Pricing Officer

Reuters’ veteran commodities reporter Bob Burgdorfer published a profile of SignalDemand yesterday establishing them as the only company offering a margin optimization solution to the food and meat industries on a large scale. The article was titled “Food Price Volatility Helps SignalDemand” - here is an excerpt:

“…SignalDemand’s software uses algorithms and econometric modeling, allowing customers to input the cost of ingredients such as corn, wheat, or soybean oil, to determine how much to charge for finished products.

Companies  can also calculate how high or low their prices need to be in the future, because sales contracts to restaurants and other food service customers are often for a one-year period.

‘The tremendous volatility is making people nervous about long-term contracts,’ said [Mike] Neal, [CEO of SignalDemand]…”

Commodity markets swinging high and low, combined with the global economic downturn means that manufacturers can’t afford to not be on their toes. Manufacturers need highly accurate forecasts to give them confidence to commit to long-term contracts.

Lucky for them, SignalDemand is up to the task - ready and able to help manufacturers compete in a tight market. (Disclaimer: I am a board advisor for SignalDemand)

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. 

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.

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.

Enter at Your Own Risk

I recently read a report from one of Gartner’s top analysts, Michael Dunne. His estimate of the price optimization and management software market is now up to $150 million for 2007. Further, he believes it will grow over 30% each year for the next few years. That’s impressive, given the that most markets, even software, are shrinking or flat. “The potential for this market is significant,” Dunne states, “because defining and defending optimal prices is a fundamental imperative for enterprises responsible for producing returns for stakeholders.” Amen to that.

It shocks me that smart business managers out there still rely on spreadsheets to make pricing decisions where a penny here or there can have a multi-million dollar impact on the bottom-line. With commodity prices whipsawing, competition increasing, information traveling at the speed of light and product and customer complexity expanding across the globe, how could anyone keep up using a Microsoft Excel spreadsheet? Not even a Mensa-certified Ph.D. can race ahead of the speeds and feeds that corporations now face in making pricing decisions. Dunne agrees. “Traditional approaches, such as employing spreadsheets to analyze and manage prices, increasingly are being viewed as inadequate.”

Now’s the time to “Ctl-Alt-Del” that Excel spreadsheet you’re using to make pricing decisions. Wall Street has. The hedge fund guys have. The commodity traders have. When will the manufacturing community take analytics seriously? As Dunn projects, and I agree, they are starting to take notice. Price optimization is now a board-room topic…”Toast that spreadsheet and get us some software that will systematically improve not only our pricing practices and strategies, it will add millions to our margins and bottom-line profits.” Great call. And if your big enough, that could easily be over $150 million in the next few years.

So who should you call? In the June 30, 2008 Gartner report, Dunn cites among others: Oracle-Siebel (www.oracle.com), Oracle E-Business Suite (www.oracle.com), PROS Holdings (www.pros.com) and SignalDemand (www.signaldemand.com). By the way, if you want SaaS (Software as a Service), which everyone is clamoring for these days, SiganlDemand is the only pricing software dedicated to the on-demand delivery model. Also included in Dunn’s list? Microsoft (www.microsoft.com) So even if you do smart-bomb that Excel spreadsheet, the folks in Redmond have plenty of other cool stuff for you.

Who needs price optimization?  Any business-to-business (B2B) corporation, of course.  But with all kinds of software vendors and consultants pitching all kinds of tools and capabilities, where do you start? 

First, you must start with a solid definition of what “price optimization” means.  Otherwise you introduce a Tower of Babel to your sales, marketing and finance organizations.  Speak the same language.  I’ve searched all the vendor and industry analyst websites and have met with a number of software insiders to develop my own definition of the “price optimization” market.  It works.  It’s battle-tested.  Because, actually, it’s three definitions, not one.

Before I define them for you, here’s the “language” I opted to employ in the formulation.  First, I’m using a commercial definition - B2B - big companies selling lots of products to lots of other companies.  Second, I’m only looking at closed-loop pricing processes such as price analytics, price optimization and price execution.  Third, many of the vendors out there only deal with “demand-side” pricing, that is, they only consider optimizing one end of the supply chain - the customer end.  So the definitions from small little software folks like Vendavo and Zilliant did not make my cut, since price optimization must encompass the entire value chain - the “supply-side” and the “demand-side.” 

So here are the three categories of the price optimization market with an easy to remember moniker: A-E-S-O-P.  That’s right, the fable guy.

ANALYTICS.  At the front end of the price optimization machine lies ANALYTICS, those functions that help you to identify and uncover historical trends in your pricing.  Usually analytics means shoving a bunch of transactional and contract data into databases or spreadsheets and divining out some insight.  Lots of folks sell analytical tools, cloaked these days in fancy terms like Business Intelligence and Knowledge Management.  Most of it is just ANALYTICS.  It’s useful, it helps to uncover market dynamics or ferret out pricing anomolies.  Every software company in the pricing space has some capability here.  Mostly (sadly) people rely on spreadsheets for this.

EXECUTION is what you do once you’ve conducted your analysis.  Price Execution is all about the functionality that supports making pricing decisions - disseminating pricing information, providing guidance on pricing practices and deal negotiations.  It’s often bundled with automation in the form of review and approval processes.  Folks like SignalDemand, SAP and Oracle provide execution capabilities.

Lastly (and most importantly) we come to STRATEGIC OPTIMZATION of PRICES.  The SOP in our AESOP moniker.  SOP is all about the modeling and rules that go into identifying and defining optimal pricing strategies and price bands.   Here, the only true end-to-end price optimization solution is SignalDemand (www.signaldemand.com) since in our definition, prices are as much about supply-side levers as they are about demand-side levers.  (And actually, it’s not software, it’s SaaS - software as a service - so it’s fast and easy to implement and run.)

So there are the 3 categories of price optimization, AESOP = Analystics, Execution, and Strategic Optimization of Pricing.  If you are thinking of buying software, consider AESOP and make sure you are covering the full spectrum, otherwise the emperor won’t be wearing any clothes to the board meeting on margin imporvement and profit optimization.

Vendors Cited:

Oracle (www.oracle.com)

SAP (www.SAP.com)

SignalDemand (www.signaldemand.com)