Making sure the price is right

Pricing software vendors say their products can transform the art of pricing from what amounts to a guessing game into a disciplined, fact-based process that contributes directly to the corporate bottom line.

By Jean Thilmany, contributing editor August 19, 2009

Though he can’t divulge actual numbers, Robert Smith, director of corporate pricing at Eastman Chemical Company, says his organization has seen significant financial benefit from the adoption of pricing software.

Items made with Eastman Chemical products

And Michael Dunne, a research VP at industry analyst firm Gartner, says Smith is likely speaking the truth.
"Companies that have implemented pricing software have increased gross margins by two to five percent," says Dunne. "But such software has only relatively recently become broadly available."
Eastman Chemical offers a prime example of the challenges manufacturers constantly face in trying to strike a balance between satisfying the customer and turning a profit on each transaction.
The company operates in an arena in which freight and raw material costs fluctuate daily. It also is globally dispersed, which can make it difficult for sales people and pricing managers working in any one location to get all of the information needed to make proper pricing decisions.
That picture has improved, however, since Eastman adopted pricing software from Vendavo.
The solution helps Eastman determine the best price for each single transaction by giving company executives, pricing managers, and sales people up-to-the-moment snapshots of all the factors that go into setting price. These factors include:
• The current cost of raw materials needed to make the product;
• The cost of shipping the order to the customer; and
• A history of what the customer has paid for similar products.
The market for pricing software-or what the vendors prefer to call pricing optimization solutions-is dominated by a few players, including Vendavo, Zilliant , and PROS Holdings .
These vendors say their products can transform the art of pricing from what amounts to a guessing game into a disciplined, fact-based process that contributes directly to the corporate bottom line.
Dunne says these newer pricing solutions also allow "normal people"-such as a salespeople and pricing managers-do to sophisticated analysis on market trends in order to set prices effectively.
"Until recently, most price setting was done by working with consultants or other experts who have their own methods for assessing market trends and offering advice on setting prices," Dunne says.
By contrast, he adds, today’s pricing software synchronizes the pricing-related information from multiple sources-ranging from a company’s internal systems to third-party data services-and presents it to users in a format that is easy-to-understand.
For instance, before adopting Vendavos’s pricing software, Eastman manually pulled together information from different sources. An Excel spreadsheet, for example, might contain pertinent cost information. Problem was, those information sources weren’t updated often enough to play a role in day-to-day price setting, Smith says.
"It was nearly impossible to do accurate analysis because many of the data sources you were pulling from manually would be changing from day-to-day," Smith says. "Unless you have a lot of manpower available, you’re not going to update records like that Excel spreadsheet on a routine basis."
Vendavo’s pricing software allows for creating links to all sources of pricing information, which means Eastman is constantly getting new information from sources that update data at regular intervals. "So rather than spending hours pulling together the information to do the pricing analysis, you can do it in seconds," Smith says.
The Vendavo solution implemented at Eastman includes two main components:
• Vendavo Price and Margin Analytics , which allows for analyzing the history of business transacted with individual customers; and
• Vendavo Deal Execution , which permits a review of every price change proposed by a salesperson or customer.
Smith’s team uses Price and Margin Analytics to review the profitability of past pricing strategies with an eye toward improving those numbers going forward. "We can look back and see if there are areas where price leakage occurred-where we didn’t prices things as effectively as we could have," Smith says. "Or, we can see where freight, raw material, or other costs of serving our customers were higher than anticipated, indicating that perhaps we should have charged a higher price to reflect the true value we were bringing to the customer."
The system also helps when salespeople contend competitive pressure calls for cutting prices below recommended levels.
"If we have a customer that calls a sales representative and says‘I have a competitive price from another company on one of your products and I want you to reduce your price to meet that,’ our pricing personnel will review the request inside the software to see the impact of the requested price on profitability and margin and compare it to other prices we’ve approved for other customers for the same product," Smith says.
Dunne believes pricing software will help manufacturers maintain, and in some cases increase, margins during this tough economic time.
"We’ve seen companies use pricing software to help them hold the line during a pretty crazy 12 months," he says.