Chief Pricing Officer

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.

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)