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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.

Walsh sees two reasons beyond technology for increased attention on pricing. One is that companies are focused on growth after several years of cost cutting, and price is a clear way to hike revenue. And second, all the investment companies have made in procurement strategies during the recent cost-cutting years has made buyers extremely well-informed and disciplined, while the sales side isn't nearly as well-equipped. "Ten, 12 years ago, procurement was very undisciplined," Walsh says. "Now strategic sourcing is a very important part of the strategy at most major companies. And [salespeople] are hitting up against these very large and very powerful procurement operations."

Emerson's companywide pricing project started in November 2003 with Peters, one of the five members of Emerson's top executive team, being given the task to look at better pricing as a way to improve profits. There are several components to the program, but the one having the broadest impact is implementing and customizing a price decision-making tool from Vendavo Inc.

THE UPSHOT

Many companies haven't focused on price optimization, even though, when done right, there's high potential to increase revenue



IT and business execs have worried that the technology is too new, the necessary data isn't available, and customers might be put off by price-optimizing efforts



But, as technology matures, many IT units, particularly in business-to-business markets, are taking a hard look at it



Pricing programs have clear potential to spur growth and counter buyers who are well-equipped with IT-enabled procurement strategies of their own


Vendavo has a Web-based interface that lets Emerson break price into the most-important factors: price for the product, but also for shipping and payment terms, delivery time, customization, or engineering. Salespeople fill in a template with the terms of a specific deal, and on each line there's information on each of the factors. When a salesperson looks at the shipping line of a deal, the software might say that no other customer in that part of the world gets free shipping or that they only do on orders worth more than $10,000. Vendavo flags parts of a deal that are out of the norm and lets managers set up approvals for deals that fall outside specified parameters. It helps fight profit "leakage," where costs get added or prices cut without good reason.

What makes the system work in business-to-business environments is the extent to which the factors affecting profitability can be customized, Peters says. When a division is ready to implement the software, Peters meets with the unit's leaders to brainstorm every factor that might affect profitability, identifying which deserve attention and ranking them. "We build the system only around the factors that will have the greatest profit leverage," he says.

Implementing the system poses technical challenges as well. "Response time is incredibly important," Peters says, since it's providing real-time data to salespeople. Emerson uses BEA Systems Inc. middleware so it can have multiple instances on each server and do load-balancing so salespeople aren't delayed. One other technical surprise has been data-size limits; the 32-bit architecture on which the Vendavo system is built limits the historical data Emerson can pull in to evaluate a transaction's profit, in one case to just 15 months. Peters is eager for an upgrade to a 64-bit version.

Besides the transaction components, Emerson is using the Vendavo software to analyze price trends, such as whether a customer falls outside the normal pattern on total price or a pricing factor consistently shrinks profit. While the goal is to maximize price, the way a company gets there is by having a clearer rationale for why each element of price is set, Peters says. "One of the things you learn about pricing is you want equality. You're trying to find your outliers," he says. "You're not only trying to raise prices, but you're trying to be balanced and have some logic behind how you're dealing with people."

Mark Bergen, a professor at University of Minnesota's Carlson graduate school of business who researches pricing, sees companies across industries applying more sophistication and technology to pricing. There are two big pitfalls in applying IT systems to pricing strategy, he says: people using the system without understanding what's driving it, and people using it in a way that optimizes prices but also alienates customers because of factors outside the system's understanding.

"Having the data doesn't mean you're at the hub of what matters," Bergen says. "A lot of companies will make mistakes around the data they don't have. Good companies are balancing revenue-management initiatives with a lot more consumer research that asks, 'Is it causing confusion? Is it leaving customers feeling ripped off?' Because that's a lot more important than squeezing the last dime out of a deal."

Bergen has seen retailers automating some markdown prices, so their experienced and expensive staff can focus only on the decisions with the highest value. He likens it to a "pricing factory," where the job is to efficiently produce prices, automating what it can and using skilled labor only where there's the most to be gained.

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