Chief Pricing Officer

Today Businessweek magazine is featuring comments from my friend and colleague Mike Neal (CEO, SignalDemand) on its homepage in reference to the article “Grocery Stores Fight Back Against Food Prices.”

According to its editorial staff, Businessweek’s new online “In Your Face” section highlights readers that offer “smart, incisive comments that move the conversation forward” - and this week the topic is Food 2.0:

The article is a worthwhile read, taking a look at the quickly forming “battleground” over food prices. Here’s an excerpt to give you an idea:

A year ago, when the cost of commodities such as wheat, oil, and corn was soaring, grocers grudgingly accepted price increases from Kellogg (K), General Mills (GIS), H.J. Heinz, (HNZ) and other food manufacturers. The strange thing is, those price tags never came back down, even when commodity prices collapsed in the fourth quarter of 2008. As a result, grocers have little cheer to offer their shoppers at a time of deepening economic gloom. “The prices don’t seem to go down as fast as they go up,” says Jeffrey Noddle, CEO of Minneapolis-based Supervalu, one of the nation’s leading grocers.

Now, the grocers are demanding action. On Jan. 7, Noddle told analysts to expect a “battleground” over the next six months as he pressures manufacturers to adjust their prices. And if they refuse? “In almost every category,” notes Noddle, “you have other vendors to look to.”

The food companies recognize that increases in the price of food outpaced commodity inflation during the fourth quarter last year, which should have resulted in higher profits. However, they argue, previous price hikes didn’t completely cover escalating production and commodity costs….

And for your convenience, Mike Neal’s comments in full:

Every major food producer has been anticipating this impasse. The problem lies in the fact that many producers don’t have the ability to accurately resassess their risk if they were to adjust prices. In order to confidently renegotiate contract prices, food producers must be able to accurately calculate the impact of price changes on volumes and margins, for each product line and customer contract.

Part of that calculation is a prediction of the success of demand shaping with strategic price changes. Without this knowledge and assurance, food producers with long term contracts could be effectively signing their own death warrants if faced with another jump in commodity prices.

Fortunately, technology has caught up with the pressures of the global marketplace and food producers are starting to adopt technologies that allow them to bring a new transparency and confidence to price strategy and contract negotiations. I envision that a new role - Chief Pricing Officer - will emerge from this awareness of the powerful strategic role pricing can play in the enterprise.

All you price professionals out there - what’s your take? Weigh in with a comment of you own on ChiefPricingOfficer.com.

Rip

The art and science of price strategy is not easily understood, let alone mastered. P.J. Jakovljevic at Technology Evaluation Centers (TEC) has undertaken this field as part of TEC’s coverage of supply chain issues.

Jakovljevic demonstrates keen insight in the not-to-be-underestimated area of pricing and offers several interesting articles via the TEC blog. He recently posted Part 2 of his analysis of SignalDemand, which I encourage you to check out, along with his overview of other pricing technology vendors. Here’s a brief excerpt to give you an idea:

Pricing Science of Matching Supply and Demand

Other price optimization solutions really only consider the demand side of the pricing equation, and these results are insufficient for manufacturers to make decisions when they need information on capacity and production constraints as well. SignalDemand’s hand-picked team of scientists and mathematicians from prestigious universities have built a pricing science based on eight pending patents.

This sophisticated science drives the recommendations provided by the software application. When making decisions on margins, the idea is to account for all major profit drivers such as to

• align strategic business objectives with pricing decisions;
• understand demand drivers to forecast future sales;
• account for fluctuating costs;
• on the supply side, account for asset utilization, available capacity, and inventory situation; and
• determine the most profitable product mix for a given demand.

Accounting for all the above factors helps with much more complete, consistent and actionable information to better anticipate future costs, forecast demand, identify poorly performing products or customers, and explore projections in the context of historical sales.

I encourage you to check it out along with his overview of other pricing technology vendors and general supply chain coverage.

SignalDemand: Dealing with Supply- and Demand-side Pricing Matters — Part 1

SignalDemand: Dealing with Supply- and Demand-side Pricing Matters — Part 2

The TEC Supply Chain Logistics Blog

Many hearty congratulations to Dan Ariely, who was just named one of Fortune’s “10 New Gurus You Should Know.” Very good stuff, and the article concludes with Ariely’s research into pricing issues:

Ariely, 41, also studies the logic behind spending patterns - what consumers are willing to spend on a product vs. their understanding of its value. And that will make him a very popular man in this economy.

Ariely, of course was the keynote speaker at our SIGNALS 2008 event, where he talked about negotiations and the role of human weakness in making decisions. We’ve talked about him before in this space, and it’s nice to see him get even more recognition for his work from a well-respected publication like Fortune. So, again, congratulations Dan, and keep up the good work.

SignalDemand customer, Hormel, was featured in The New York Times yesterday. In fact, the article was the 4th most emailed story on the NYTimes.com site. According to food reporter Andrew Martin, Hormel is working overtime to supply the nation with what many think of as the most economical of all proteins: Spam.

Though Martin doesn’t name prices or get into marketing strategy in the article, the gist is that, in times of economic belt-tightening, consumers are reaching for the foods they think of first when it comes to penny-pinching. In fact, the Times refers to Spam as “the most emblematic hard-times food in the American pantry.” Here’s a little more from the article, just for fun:

“Spam holds a special place in America’s culinary history, both as a source of humor and of cheap protein during hard times.

Invented duing the Great Depression by Jay Hormel, the son of the company’s founder, Spam is a combination of ham, pork, sugar, salt, water, potato starch and a ‘hint’ of sodium nitrite ‘to help Spam keep its gorgeous pink color,’ according to Hormel’s Web site for the product.

Because it is vacuum-sealed in a can and does not require refrigeration, Spam can last for years. Hormel says ‘it’s like meat with a pause button.’”

Though Hormel President Gary Ray wasn’t quoted in the New York Times story, he shared candid and upbeat “lessons learned” in pricing strategy with other major manufacturers at SIGNALS last month in Las Vegas.

At last week’s SIGNALS 2008, SignalDemand’s annual executive summit, I was honored to participate in discussions and listen to presentations from renowned economists, pricing experts and senior manufacturing executives on the theme of “Forecasting the Future.”

The event was a reality check in terms of what the manufacturing industry is facing - a tightening squeeze due to continuing input cost volatility and, now, an economic crisis that weighs on both ends of the industry: pressure on the production side and shifting demand on the consumer side. But, SIGNALS also offered expert words of wisdom and practical advice on the importance of price strategy to help manufacturers not only survive, but actually thrive in these times.

Some highlights from SIGNALS:

• Dan Ariely, Ph.D. and Duke University professor, shared his astute observations on negotiations and our own weaknesses (more on this in future CPO posts).
• Gary Ray, president of Hormel, highlighted the importance of forecasting and price strategy at Hormel Foods.
• CPO panel: Pricing experts Bill Chandler from Cargill and Scott Newman from Ventura, demonstrated how they have truly elevated the pricing function within their organizations.
• Tom Elam, Ph.D. and president of FarmEcon, an agricultural and food industry consulting firm, presented impressive research on the changing linkages between food and fuel.

Bottom line: If you deal with price strategy in manufacturing, SIGNALS is a must-attend event.

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. 

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)