2009 Innovation Insight Awards: Getting pricing right
MOST INNOVATIVE PROCESS
Having exhausted most of their ideas for cutting operating costs, a growing number of corporate executives are looking at how the prices they charge for products and services impact the bottom line. Zilliant, a supplier of price optimization software, is glad to be a part of such discussions. One of its customers, a building products maker, boosted profit margins simply by using Zilliant’s software to inject discipline into its pricing process.
The method used to get this manufacturer to see the value of a price optimization strategy earned Zilliant a fourth place award in MBT’s 2009 Innovation Insight Awards competition.
In conducting a Six Sigma review, the building products manufacturer discovered that its pricing process was complex, poorly understood by its workforce, and ultimately relied to heavily on undocumented "tribal knowledge." This resulted in salespeople offering customers a broad range of prices on similar products, with as many as 50 percent of sales orders transacted below lowest-approved prices.
By analyzing the manufacturer’s historical sales and order data, the Zilliant software identified roughly 6,000 price segments—clusters of homogeneous transactions that demonstrated a similar price response. For each of these segments, the software produced a range of five price points: start, target, discount, deep discount, and floor.
A control group of the company’s sales representatives was told to use these price points—and stick to them—when negotiating with customers. The remaining sales staff conducted business as usual.
Six months later, the group using the Zilliant price points had substantially increased its margin contribution relative to those representatives working as usual. That prompted the company to start rolling out the Zilliant tools to the entire sales force. Today, Zilliant price optimization software is embedded in a Salesforce.com based quoting application accessible in the field through handheld devices such as Palm Treos and tablet PCs.