Chief Pricing Officer

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

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)

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.

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)