Chief Pricing Officer

Cooperation Means More Pie for Everyone

In a downturn, especially one with deflationary moves at retail, you get enormous pressure on margins throughout the supply chain - that’s generally not debated.

There are several ways supply chain companies might react to this: manufacturers - especially those with frequent price and promotion changes - may apply analytics to the price setting process, to get much sharper about what wholesale price they’re willing to accept for their products. This advantage comes not only from quantifying their customers’ price elasticities, but also from understanding the relative margins available from various products they sell which compete for the same capacity and raw materials.

Analogously, the retailer might apply sharper analytics to the purchasing process, to more accurately measure their seller’s indifference points and minimize product cost.  While both of these measures can have a significant positive impact on margins, there is a different approach with much bigger potential: cooperation.

If the manufacturer and retailer simply work together, and make an effort to help solve each others’ “problems” there is usually a bigger advantage available to both. For example, if a manufacturer’s sales team works with its retail customer to optimize exactly which product promotions will work best in specific stores, in specific time periods, he provides his customer with knowledge acquired from a much larger data set than the customer has available on his own.

However, what really turbo-charges this model is that there are win-win opportunities available at times when the manufacturer is undersold or “long” on a product in some future time window, say six weeks out, and needs to solve this problem. In this case the manufacturer calculates how much discount it’s willing to offer to get back into “balance,” and uses analytics to decide exactly which retailer customer would get the most bang for the buck from putting this product on promotion in that window, and then works with that retailer to strike a deal. So the manufacturer fixes a problem, and the retailer gets help with a promotion tailored to their own customers’ preferences, and for which they bought the product at a very special price. This is much better for both parties than haggling - no matter how good they are at it!

The bottom line is that there are clear, and significant, advantages to manufacturer-retailer cooperation, when they work together as real partners.

Thanks to the advanced price and product mix optimization technology manufacturers and retailers are starting to use today, it is possible for the entire supply chain to sharpen their game - and their margins. BOTH sides can  get a bigger slice of the proverbial pie.

Mike Neal, Founder & CEO
SignalDemand
www.signaldemand.com

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

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. 

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)