Beyond spreadsheets: Price management needs dedicated tools; market space still being defined

Despite the importance of price as the determinator of revenue and profit, many companies remain baffled by the complexity of managing the pricing process, and fail to dedicate the necessary resources to the issue. While the outlines of the fledgling pricing software space are somewhat murky, many organizations are ready to improve their pricing programs.
By Karen Dilger, contributing editor (kadilger@comcast.net) June 1, 2008

Despite the importance of price as the determinator of revenue and profit, many companies remain baffled by the complexity of managing the pricing process, and fail to dedicate the necessary resources to the issue.

While the outlines of the fledgling pricing software space are somewhat murky, many organizations are ready to improve their pricing programs. This finding was one of several points illuminated by a survey hosted by the Professional Pricing Society (PPS) and Zilliant , a pricing analytics and management supplier.

Results confirm that advanced pricing techniques require more powerful software, but the vast majority of companies still rely on spreadsheets as their primary pricing tool.

“Price optimization is still an advanced concept for many companies,” says Kevin Mitchell, CFO of PPS. “However, there is evidence of an upswing in recognition since 13 percent reported implementing price management software in this survey, while only 5 percent said the same four years ago in a previous study.”

Few survey respondents describe their current pricing processes and tools as very effective, and nearly 73 percent have active price improvement initiatives under way. They also cited improved profits as the primary goal of price management systems, says Mitchell.

“Companies have spent the last decade investing in enterprise resources planning systems and accumulating a wealth of data,” says Mitchell. “They are ready to take advantage of the data and improve the pricing decision-making process.”

The survey was sent to more than 25,000 pricing professionals primarily in manufacturing, distribution, and industrial services. More than 500 companies responded, ranging from small to large organizations.

Ideally, in a steady economy, the goal of price management is to improve both profits and revenues. However, during a recession, many companies lower their expectations.

Despite advances in techniques and tools, most companies still set pricing based on competition and costs.

“Today, many companies are not prepared to increase prices or marketing dollars to improve revenue,” says Narayanan Viswanathan, research director for supply chain and logistics with Boston-based Aberdeen Group . “Companies will continue to optimize costs and profits in the short term, and will focus on growing revenue and market share when the economy improves.”

Since price optimization as a software category is still in its early stages, determining ownership of data can be a challenge, says Viswanathan.

“Sales and marketing and engineering departments all have touch points into pricing, but they typically operate in separate silos,” he says. “When a bill of material is created, the product is given a base price, but then marketing adds features to bump up the selling price.”

Viswanathan says some price management tools are too complex for the average user and require more in-depth knowledge and skills. “There is a real trick to using some optimization systems. It is not as simple as plugging in numbers to a forecasting or demand-planning system,” he says.

Price velocity—i.e., profitability per minute—is another important metric some optimizations systems are starting to include. The price of a product is not only based on cost, but also on how easy it is to make, says Viswanathan. “Prices should be lower for those items that can be made more quickly, which will in turn maximize profit margins.”