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5/6/2005
09:30 AM
Chris Murphy
Chris Murphy
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Top-Line Impact

Price optimization is moving up the priority list at many IT organizations, especially in business-to-business markets.

IT leaders know the shortest road to glory isn't delivering faster computers or even helping cut costs. The single surest way for IT to prove its value is to increase the company's revenue.

Strange as it sounds, most IT execs and many business leaders haven't made setting the right prices of the products and services their companies sell a top strategic priority. That's particularly true when it comes to IT investments to support business goals. Companies have heaped money on enterprise resource planning and wrung costs from supply chains. They've built systems that allow online buying and selling, and they've sweated procurement systems to make sure they don't overpay for raw materials. But they haven't put that kind of broad, strategic focus on IT systems that analyze their pricing practices, help managers optimize prices, educate salespeople, and enforce pricing at the point of sale.


Emerson's Peters is leading an effort to get decision-support software to salespeople so they can make better pricing decisions.

Emerson's Peters is leading an effort to get decision-support software to salespeople so they can make better pricing decisions.

Photo by Bob Stefko
But pricing is moving up the IT priority list at more companies. It's gaining particular attention in business-to-business markets, where factors from maturing technology to a return-to-growth mentality are driving change. "Price is so obvious, but as a management discipline, it hasn't been a focus," says Charles Peters, senior executive VP at Emerson Electric Co., which had $15.6 billion in sales last year from a range of businesses, including commercial refrigeration and heating systems, precision temperature controls, and ClosetMaid closet organizers. Peters is leading a companywide effort that includes using Web-based decision-support software to give salespeople the information they need to make better pricing decisions and managers the analytics required to set more-profitable policies.

Just how big an impact can improved pricing have? Emerson during the last decade used various means to boost profits, such as lowering costs through global procurement, and successfully added 1.5% to 2% to each division's operating margin in each five-year period. By using price-related programs, including a software initiative started last year, some of Emerson's division managers believe they can double their expected margin improvement. That's why the pricing project is slated to roll out to about 20 major divisions of the 60 that make up the company.

In a study two years ago (one that pricing-software vendors love to cite), consulting firm McKinsey & Co. pointed to price as the most-important lever for improving business performance. A 1% rise in price would bring an 8% increase in operating profit for the typical Standard & Poor's 500 company, 50% more than a 1% cut in operating costs, the study concluded.

Office-furniture manufacturer Steelcase Inc. recently started a broad drive to find ways to use data to make better decisions. Price was the first place it looked. "We really wanted to start it in pricing because we knew that environment was very ripe, that there was most likely a lot of low-hanging fruit," says John Shull, Steelcase's director of pricing and contract administration. The company applied multiple data-mining techniques to look for what Shull calls "myths and bias" in long-held assumptions about pricing. Steelcase executives wanted to get that high-level view before they considered implementing software to optimize or enforce prices. "That may very well happen, but the first thing we wanted to understand is the patterns within our own data, so we could say, 'There are some pricing programs we have that don't make a lot of sense and some that make more sense than we thought,'" Shull says.

There are good reasons why pricing hasn't been a hot area for IT-enabled change--and why some managers think it still isn't. Questions about the maturity of technology, data availability, the risk involved, and cultural conflicts hang over a technology strategy aimed at price. One big worry: A company that locks into an IT-enabled pricing-support system that fails to capture the nuances and complexities of its specific business could face disaster. "They're able to make bad decisions faster," warns Peter Walsh, chief marketing officer for consulting firm Strategic Pricing Group. "With pricing, it has such an immediate impact on the bottom line."

Customers, too, can be skeptical of technology-driven pricing. Many managers won't talk about how they use these sorts of tools, fearing that their customers will think they're out to gouge them. Remember Amazon .com Inc.'s experiment with dynamic pricing in 2000, conducting tests that gave different discounts to different customers? Customers hated it.

Yet, Walsh sees more senior executives looking to optimize their pricing strategies, usually with the help of IT. The change is particularly notable in business-to-business markets, where the technology is getting more mature, he says. Specialized price-optimization tools have been around for years in some industries: Airlines and hotels use them to manage yield from seats and rooms, and retailers to help get markdowns exactly right. But overall, less than 3% of companies have effective price-management processes, estimates AMR Research analyst Laura Preslan.

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