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Price optimization is moving up the priority list at many IT organizations, especially in business-to-business markets.
May 6, 2005
Clothing retailer Burlington Coat Factory Warehouse Corp. recently said it plans to use a tool from ProfitLogic Inc.--one of several companies that specialize in helping retailers optimize markdown strategies--to manage its pricing and inventory more efficiently. "We hope to allow our merchants to spend more time on strategic merchandising activities and less time on intensive data analysis," Mark Nesci, the retailer's chief operating officer, said in a statement.
Royster Clark Inc. looked into IT tools for price optimization, sized up the risks and rewards, and took a pass, says Robert Paarlberg, managing director of IT at the company, which sells seed, fertilizers, and other chemicals to about 50,000 farmers through 600 salespeople. The 100,000-some transactions a year that drive Royster Clark's business each get negotiated separately, driven by a salesperson's ability to mix and match a unique batch of products based on knowing the farmer. "Because of the nature of our product and how it's sold, our successful people are horse traders," Paarlberg says. "They find a way to make it a deal that's good for the farmer and good for the company." Royster Clark concluded that optimization tools couldn't support the customized nature of each sale, and technology might get in the way of the seller-farmer relationship.
One reason more companies are considering IT-intensive pricing projects is that they have the data for it. ERP, inventory-management, and customer-relationship-management systems have given companies electronic-transaction histories from which to work. But data is also one of the obstacles. "No matter how clean you think your data is, it's worse," says Larry Warnock, VP of marketing at price-optimization software maker Zilliant Inc.
That's what Steelcase found with its pricing project. The goal was to use data to test whether long-held beliefs stood up to reality. But the company's transaction data wasn't good enough: Factors customers cared about, such as prices, shipping times, and addresses, were accurate, but internal codes, such as transaction types and location codes, weren't. "Because we weren't doing anything very strategic with our data, it was OK to have data that was less than accurate. We took shortcuts to get orders out that made it very difficult to do analysis on the back end," Shull says. Resistance to changing long-held pricing beliefs--ones that prove to be myths--can be staunch, he warns, so data has to be strong. "These myths tend to be very pervasive, even in the face of a very strong fact base," he says.
Steelcase worked with a custom-software developer, NuTech Software Solutions Inc., to cleanse its data and build more-disciplined collection techniques. NuTech also built a customized analysis engine capable of exploring historical sales, extracted from SAP data into a database, to test key pricing questions. (Steelcase won't reveal the 10 assumptions it tested, saying they're too central to its competitive strategy.)
Software vendors contend that a lot of what their systems can do can be built on "good enough" data--data doesn't have to be perfect like financials; it can include, say, estimated shipping costs and still be accurate enough to do pricing analysis and set new guidelines. "This market isn't called 'pricing perfect,' it's pricing optimization," says Zilliant's Warnock. "It's making pricing better."
Aside from the data obstacles, the cultural and customer risks, and the technology hurdles, there's the perennial question for any business leader who's considering a pricing project: On the long list of IT projects they'd like to explore, where should this one rank?
Here's how Peters at Emerson looks at it: Emerson has 45 brands of ERP systems and is consolidating worldwide on an Oracle system. That raised the question early on of whether Emerson should postpone the pricing initiative until after the ERP consolidation is done. There were advantages to that, such as potentially saving some data-integration work since the pricing system relies in part on ERP data. But Emerson is charging ahead with the pricing project, which takes up to four months to implement in a division. As of March, the company had two divisions running on the system and three divisions in implementation, and it expects at least a dozen to be using the software by next year.
That's because this is one IT project with clear potential to raise profit. Says Peters: "It's too costly a decision to wait, so we're going to do it sooner rather than later."
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