Leveraging Price Management
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Transcript of Leveraging Price Management
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In the current turbulent times, organizations are trying to
look for measures to contain the cost of products or services.
However, pricing and its impact on profitability is largely
ignored. This paper attempts to discuss how prices can be
managed effectively to increase profitability, the
importance of pricing as a discipline, and the benefits an
organization can reap by adopting a systematic approach in
enforcing and managing pricing. This paper also elaborates
on various aspects of a Price Management solution and the
requisite of optimization capabilities in such a solution. It
concludes with the key considerations involved in
deploying a Price Management solution.
Leveraging Price Management to Improve Profitability
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1Leveraging Price Management to Improve Profitability
Table of Content
1. Introduction to Price Management 3
2. TCS Approach to Price Management 5
4. Price Management Solution Deployment 9
5. Integration of Price Management Solution with Enterprise Application 12
5. Conclusion 15
6. List of Abbreviations 16
3. Price Management Solution 5
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2Leveraging Price Management to Improve Profitability
About the Author
Purushottam Nivaskar
Purushottam Nivaskar has over 15 years of experience in
the IT Industry, of which the last seven years have been
spent in various Business Intelligence projects. Since
2007, he has been leading the Price Management
initiatives within the HiTech Industry Solution Unit in
Tata Consultancy Services (TCS).
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Introduction to Price Management
Traditionally in a competitive market, profit improvement is viewed as a function of reduced costs. Adequate thought
is not applied to the importance and the ability of pricing to improve profit, without it having a negative impact on
other strategic objectives such as volumes and revenue.
General observations on price reveal that all productivity improvement measures through automations of processes
in supply chains, manufacturing, distribution networks and tracking customer orders focus on improving efficiency
to reduce the overall fixed and variable cost. However the mechanisms used for pricing a product have remained
relatively manual like using spreadsheets and macros.
At times, critical information such as competitive data, price lists, bundled offers and the pricing strategy remain
locked in spreadsheets of individuals. This reduces the ability of the organization to effectively leverage such
information in activities such as price setting, offer creation, Request for Proposal (RFP) responses and competitive
analysis. The processes are highly individual dependent, restricting the ability of organizations to respond
dynamically to the changing market environment.
It is observed that in a given situation, increasing the price yields more profit margin compared to reducing the cost of
a product. As illustrated in Table-1, an increase in price by 10 percent results in 10 percent more profit compared to
reduction of cost by 10 percent.
Also, it is observed that if business is operating on a very thin margin, then the impact of increased price on profit is
significantly more. As an example in Table 2, even with 10 percent increase in price, profit increases by 100 percent.
This is highly critical in the current business scenario of weakening demand and depressing revenue and profits.
However, the realities of the marketplace are not so straightforward. Ad-hoc price increase can deter customers from
purchasing or expose opportunities for competitors. On the other hand, ad-hoc price reduction can impact revenue
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Leveraging Price Management to Improve Profitability
Baseline
Price
Cost
Profit
Price
Cost
Profit
Price
Cost
Profit
80%
20%
30,000.00
24,000.00
6,000.00
33,000.00
24,000.00
9,000.00
30,000.00
21,600.00
8,400.00 600.00
Reduce Cost by 10% Increase Price by 10%Incremental
ProfitIncremental
Profit %
Table 1: Impact on Profit: cost reduction versus price increase
Case 1 Case 2
10%
Baseline
Price
Cost
Profit
Price
Cost
Profit
30,000.00
27,000.00
3,000.00
33,000.00
27,000.00
6,000.00 3,000.00 100%
Increase Price by 10%Incremental
Profit - (Directimpact on
bottomline)
Incremental Profit %
Table 2: Impact of increased price on profit margin
90%
10%
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4Leveraging Price Management to Improve Profitability
and profitability. The marketplace is continuously evolving. For most of the products, more so in industries which are
at the forefront of the technology revolution such as High Tech, Telecom, Aviation, Utilities, significant R & D cost is
incurred even before it is launched into the market. Some of these products have a very niche market to target. Such
situations, where huge investments are involved and product retiring happen quickly exert immense pressure on
organizations to ensure that they recover the costs (and make profit) within the available product life and market.
Fierce competition and accelerating product commoditization compel organizations to restrict any opportunities of
experimenting with prices.
Organizations considering the option of raising prices without losing market shares are challenged with many
questions such as :! How to find the best price objectively?! How to position this price into the current market situation?! How does this price compare with other competing products?! Is the process to find such revised prices repeatable over a period?! Can it be used consistently by multiple users, for multiple products, for multiple customer segments?
If such questions remain unanswered, organizations tend to get defensive leaving money on the table or use intuition
and apply ad-hoc pricing, both ultimately resulting in revenue leakage and reduced profitability. Hence, finding the
optimum price is very desirable.
Price Management is a discipline that:
Aims to increase revenue and profitability
ces)
! By increasing or avoiding loss of market share! Across one or more company product(s)! Over an extended period of time! In a consistent and predictable manner
By helping to find the optimum price for! Identified product item or product line! In a defined market segment (customer and geography), at a particular time! In a given competitive environment (competing products and pri
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5Leveraging Price Management to Improve Profitability
TCS Approach to Price Management
Price Management Solution
TCS recommends a holistic view of the pricing processes across the organization. Accordingly, the organization
should identify stakeholders, processes, data elements and technologies involved in the pricing processes.
Organizations must explore opportunities to improve the business processes as well as avenues to leverage
advanced technologies for processing data that add value to these processes. While defining the scope of the Price
Management solution, an organization must identify:
izations must evaluate each opportunity against benefits, costs, payback time and then
prioritize them.
To maximize returns, the Price Management solution must encompass the entire product life cycle. Typically, it
begins with the initial price, when a new product is introduced into the market and ends with the markdown prices
that drive product clearance.
Scope
The Price Management solution must include processes involving the various stake-holders. The key process areas
are illustrated in Fig 1.
! Key pricing processes in the organization! Opportunities of improvement in each of them! Potential benefits of each opportunity! Changes required to improve each process process change definition, impacted users, required data sets, cost
of implementing the change, time/effort required and so on! Key capabilities required in the solution for each of the processes! Once identified, organ
PriceOptimization
PriceExecution
PriceEnforcement
Deal ManagementPrice Rules ManagementContract management
Update Price Repository ERP / CRM / POS Systems Distributors Resellers
Set Product Pricing ObjectivesSet Product Reference PriceSet Product Segmented Prices
Fig 1: Price Management - Key process areas
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6Leveraging Price Management to Improve Profitability
Price Optimization
These processes help execute SWOT (Strength, Weakness, Opportunities, Threats) analysis, which includes
competitive analysis to identify key focus areas and related pricing strategies.
Price optimization involves processes to:
! Analyze previous data, future trends, competitive information, costs involved and Key Process Indicators (KPIs).
! Segment customers, products and bundles.
! Determine segmented prices and offers.
Price Execution
For any organization, there exists multiple order capturing mechanisms. Some are located within the firm while
others reside on partner networks. Product prices are therefore disseminated from multiple points. Price execution
processes ensure that the right price is made available at every disseminating point at the right time.
Price execution involves processes to: ! Propagate price-lists; offer details, new contracts information to all the points that disseminate prices such as
Point of Sale (POS) systems, deal management systems, information portals for sales force and entities such as
resellers and distributors.
Price Enforcement
The mechanisms enforce applicable pricing rules for each order logged in any of the order capture systems. Based on
the order details such as customer, products, quantity, these processes find out and apply appropriate pricing and
discounting rules. For Business to Business (B2B) orders, relevant contracts, quotes are considered to determine
appropriate price.
Price enforcement involves processes that: ! Enforce prices through pricing rules compliance.! Use workflow-based approval process; facilitate collaboration between different stakeholders while
determining prices and quote responses.
Fig 2 illustrates the key activities that must be performed in Price Management.
1 Set Product PricingObjectives
Define Segments forProduct Customers/
Geo etc.
Analyze KPI trendssuch as - Sales,
Demand
Analyze competitiveInformation
Define Segmented KPItargets - Profitability,
Vol. Rev etc.
Set GlobalReference
Price
Analyze trends -Cost, Demand
Analyze competitiveprice trends against
Ref Price
Analyze Prev. Ref.Price against
actual price trends
UpdateCurrency
References
DefineProduct
segments
Derive Local CurrencyRef price using Global
Ref. price
Collate influencingfactors forsegments
Simulate multipleprices and theirimpact on KPIs
Set productbundles, price
schemes
Communicate Price liststo distributors, channels
Update prices inOMS
Generate PriceLists, Price
Books
Update PriceMaster
Repository
RegisterQuote
Request
CreateQuote
Response
ValidateQuote
Response
ModifyRFQ
Response
SubmitQuote toCustomer
RegisterOrder
What-ifAnalysis
ScatterPlots
Waterfall AnalysisTrend Analysis
Set Product Reference Price
Set Product Segmented Price
Update PriceRepositories
Deal Management
Analytics6
5
4
3
2
Fig 2: Price Management - Processes
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Processes 1, 2, 3, 6 represent Price optimization functions
Processes 4, 6 represent Price execution functions
Processes 5, 6 represent Price enforcement functions
Benefits
Each of the process categories brings in distinct benefits to the organization. Price optimization processes facilitate
high quality analytics, unearthing valuable opportunities to optimize prices for various customer segments. The
segmented prices have direct impact on the revenue and profitability.
Price execution processes facilitate efficient distribution of prices, avoiding delays and inconsistencies, minimizing
loss of opportunities and revenue leakage.
Price enforcement processes facilitate complex order and quote management capabilities along with a
collaborative workflow-based approval process. These ensure that the complex pricing structures are complied with
while processing orders/quotes avoiding errors in order processing. This is very critical to ensure rule-based and
consistent pricing.
Following are the key benefits of using Price Management Solution:
Recommended capabilities of a Price Management Solution
To achieve the above mentioned benefits, the solution should have commensurate capabilities. The recommended
capabilities in a price management solution are detailed as follows.
Data Modeling
Solution must have flexible modeling capability so that the respective business environment can be represented
appropriately, implying that the various data elements (customer, geography, product, competition and so on) are
captured with their respective hierarchies and inter-relations. Solution must facilitate changes to the model in an
efficient manner. It must also support large data sets for analysis, supported by advanced statistical functions.
Scenario Planning
Solution must have a What-if analysis capability to simulate different scenarios. For example, simulate price
changes by 10% or 14% and visualize the impact on say, sales volume, revenue for each of the price change.
Analytical Reporting
For the end-user, the solution is as good as its reporting capability. Hence, the solution must be able to generate
reports according to the requirements. Multi-dimensional analytical reports with drill up-down reports, graph and
! Faster pricing decisions enabling quick response to the fluctuating market situation. ! Centralized, consistent and transparent pricing processes that establish pricing discipline across the
organization.! Increased leverage of pricing related data unearthing hidden trends and opportunities.! Improved predictive analysis assessing multiple scenarios and facilitating informed decisions.! Increased collaboration and accountability for stakeholders facilitating collective decision-making and
transparency.
These result in:! Improved deal win-loss ratio.! Increased profitability and revenue.
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Leveraging Price Management to Improve Profitability
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8Leveraging Price Management to Improve Profitability
charts creation capabilities are a must. Availability of predefined templates such as waterfall analysis, scatter plots
can add value to the solution.
Price List Management
The solution must be capable of creating and updating multiple price-lists. Also, it should be able to propagate the
price-lists to various order capture systems, with utmost transparency and efficiency.
Workflow-based Approval Process
With this, it must be possible for different stakeholders to collaborate and share information. This is very useful for
the sales team spread across different geographical locations, as they can collaborate while responding to a quote
request from a customer. Also, this can be effectively used by the pricing analysts who create reference prices.
Security
The solution must have a role-based, data-level security. Also, users must have the flexibility to share specific data
with each other at their discretion. This is essential to facilitate collaborative decision making. The solution must
enable the administrators and supervisors to manage and track user security.
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On a decision to implement Price Management Solution, it is extremely important to analyze the pricing related
information.
Key Considerations
Some of the key points that one needs to ponder upon are:
Price Management Solution Deployment
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Leveraging Price Management to Improve Profitability
Points Explanation
1 Which business processes are impacted by this solution?
Who are the stake-holders of this solution?
For example, pricing analysts, sales force, product managers, sales and marketing heads and senior management.
2 What is the frequency of accessing this solution?
For example, time-based access (daily, weekly or ad-hoc) or transaction-based access (like for every deal).
3 What is the type of usage? How are we going to use this?
For example, do we need standard, template-based information every time or do we have an ad-hoc data request based on the requirement?
4 How to make this solution available to users?
How do we ensure that for every user category, there is an optimal mechanism for delivery of information? Is it possible to minimize the learning curve of the pricing solution? Is it possible to leverage the existing core applications that users are already familiar with?
5 What are the options to build this capability?
Should we build an in-house application? Will it have enough functionality and scalability?
What are the different tools available in the market? How do we compare them and find the tool that best fits our technology landscape?
Do we need a platform-based solution or a niche, best-of-breed solution? How do we integrate a best-of-breed solution into our technology landscape?
Last but not the least, what is the Total Cost of Ownership (TCO)?
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Leveraging Price Management to Improve Profitability
Deployment Options
Once the stakeholders and requirements are identified, there is a need to decide the deployment options.
Considering the complexity of a comprehensive price management solution, there are three options
1. Custom-built solution.
2. Enterprise Application Platform-based solution.
3. Best-of-breed Price Management solution.
Custom-built solutions
In-house (custom-built) solutions must be considered for very specific needs where, there is no expectation of
enhancing the functional scope of the application. It can be a very cost-effective solution if the requirements do not
need very advanced capabilities such as scenario planning.
Enterprise Application Platform-based solution
If business is looking only for Price Enforcement, Enterprise application-based solution is relatively simpler. But these
applications may not have built-in capabilities for Price Optimization.
According to the current scenario, Price Optimization capabilities are best available in best-of-breed solutions
compared to platform-based solutions.
Thus, we recommend using a best-of-breed Price Management solution that offers a highly flexible architecture
and features.
Best-of-breed solution
'Best-of-breed' solution is an off-the shelf niche product/solution that is best suited for a specific business
need. It provides maximum capability compared to alternative solutions such as modules from enterprise
applications, catering to this business need. It may need some configuration efforts to make it usable for
organization's requirements.
Typically, there are two ways of deploying a Best-of-breed solution: ! Deploying as a stand-alone solution in the organization.! Deploying the solution as Services and using these services in another core enterprise application such as ERP,
CRM to offer seamless integration with the overall IT landscape.
Before considering the merits of these approaches lets consider user groups. Analysis of different users reveals two
broad categories of users. Power Users - users like Pricing Analysts, Product Managers, who have ad-hoc analysis
requirements. Normal Users - users like geographically-spread sales representatives, who need fairly standard sets
of analytics for different customers and products. Typically, there is fairly limited number of Power Users in an
organization whereas; there are a lot of Normal Users
Stand-alone Best-of-breed solution
Deploying the solution as a stand-alone solution favors the Power Users but not the majority of the Normal Users.
Normal Users typically need template-based information for a transaction such as, response to new quote request. In
this case, they will have to enter the deal information to obtain the template-based analysis of data. They have to first
learn a new tool and also spend time accessing the analytical information each time they need to. Hence, there is a
definite overhead of learning the new tool and the redundancy of data entry. This may lead to resistance from the user
community. Also this may impact the licensing cost of the tool.
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Leveraging Price Management to Improve Profitability
Custom-built ApplicationPrice Optimization
Cost Ownership
Development Efforts
Learning Curve
Advanced Analytics
Scalability
Extensibility
ReliabilityData Synchronization with other systems
Price Execution
Price Enforcement
Enterprise Application
Best of Breed Solutionintegrated with EnterpriseApplication
For rest of the parameters
For Development Efforts andCost of Ownership
Low onDesirability
High onDesirability
Very High
High
Moderate
Reasonable
Low
1
2
3
4
5
Low onDesirability
High onDesirability
Limited
Fair
Moderate
Good
Excellent
1
2
3
4
5
Best-of-breed solution integrated with enterprise application using Service Oriented Architecture (SOA)
If the solution is deployed as a Service and integrated through enterprise application based on SOA, then the
Normal Users will be benefited as they can leverage their core enterprise application to exchange information
and obtain the analytics information without much effort. However, this type of deployment will severely restrict
the Power Users who would want to use the advanced features of the tool to obtain ad-hoc reports to facilitate
decision making.
Recommended Approach
As most of the organizations will have both types of users (Power and Normal), the best way to deploy this kind of
solution is to use both modes of deployments. Apart from providing the right kind of environment to each user
category, there are many benefits in using such a multi-mode deployment. The core enterprise applications such as,
ERP, CRM contain majority of the base data required by the Pricing Solution. Real time bridges to exchange customer
information, product information, quotes requests, sales data and other related information can be established
For Power Users, this will ensure that Pricing Solution remains in synchronization with the core enterprise
application. This ensures that analytics uses the latest data (apart from the previous data that it contains), that is very
critical for decision making.
For Normal Users, the predefined services exposed by the pricing solution, provide access to the predefined analytics
without extra efforts. Once the SOA-based interface is built, then accessing the predefined sets of analytics is very
simple and quick and does not require any extra efforts from the user. There is neither a need to learn any new tool nor
extra licensing cost involved.
Fig 3: Comparison of three approaches
*Note: The comparison can vary based on actual applications / products chosen and the customer IT, functional landscape
Fig 3 summarizes the comparison of the three approaches.
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Integration of Price Management Solution with Enterprise Application
To explain the recommended approach, we will analyze the aspects of integrating the Price Management Solution
with the popular enterprise application suite, SAP.
Consider a use-case of Quote Management.
Typically, the steps in the process are:
1. Customer approaches a sales representative with Request for Quote (RFQ)
2. Sales representative registers the quote request in SAP Customer Relationship Management (CRM).
3. Sales representative analyzes the deal request and works out the best possible quote.
4. Sales representative sends the proposed quotation to the supervisor for approval.
5. Supervisor reviews the deal and approves (or rejects) the quotation.
Fig 4 illustrates how a Price Management solution can be leveraged in the Quote Management process of a typical
enterprise application such as SAP CRM (please note that similar integration can be possible with other ERP applications. SAP CRM is taken
for example purpose only). The Quote Management process spans across the SAP CRM and Price Management Tool. The
Netweaver Composition layer provides the business logic by interacting with the backend systems through Services.
The process is presented to the user through User Interfaces (UIs) in the Enterprise Portal.
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Leveraging Price Management to Improve Profitability
Create Quote
SAP EnterprisePortal
Backend SystemData Synchronization
NetweaverCompositionEnvironment
(Services / API)
SAPPrice
ManagementTool
RegisterQuote
Request
Create /ModifyQuote
Quote Analysis &Confirmation Quote Review
Approve /RejectQuote
AnalyticsModify Quote
Fig 4: Proposed solution using SAP SOA
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Solution Architecture
The Quote Management process discussed above can be realized using SAP Service SOA. Fig 5 provides an overview
of the architecture at a high level.
The SAP CRM functionalities are exposed through SAP Enterprise Services, Web Services and (or) Business
Application Programming Interfaces (BAPIs). The Price Management tool functions are also exposed as web
services. These services are published in the service registry of the landscape. The Composite layer consumes these
services to build the solution application. The user is provided with a role based access to the Composite through the
Enterprise Portal.
SAP Process Integration layer can be used to provide automated synchronization between the SAP CRM and
the Price Management solution. It can also be used to build and extend the SAP Enterprise Services required for
the solution.
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Leveraging Price Management to Improve Profitability
Service Registry
Enterprise Portal
Server SAP NetWeaver WAS 7.0
SAP NetWeaver CE Server
Automated Synchronization
(Optional)
Fig 5: Solution Architecture
SAPCRM
EntWeb Services and
BAPIs
erprise Services,
Web Services
Price Management
Tool
SAPPI
Composite Application
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Composite layer and SAP tools
Fig 6 summarizes the layers of the composite application along with the SAP tools used to implement them.
The layers Process Workflow layer, User Interface layer and Composite Application Framework (CAF) Service layer
constitute the composite application. The CAF service layer is the business logic layer that interacts with the services
of SAP CRM and Price Management tool. It also provides local persistency and additional application logic support.
The User Interface layer provides the capability to define role-based user interfaces. The Process Workflow layer
implements the Quote Management process, which is accessed by the enduser through the Enterprise Portal. SAP
Netweaver provides the tools and the platform to implement the above mentioned layers.
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Leveraging Price Management to Improve Profitability
Service Registry
Process Workflow
User Interface Layer
CAF Service Layer
Guided Procedures
Enterprise Service
Service Provisioning Layer
Fig 6: Composite Layers
SAP Tools
SAP Enterprise
SAP Process
CAF - NWDS
Process
Role Based access on Portal
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Conclusion
By deploying Price Management solution, organizations can establish and exert control over the pricing processes.
Using scenario planning capabilities, they can increase predictability of various KPIs like sales volume, sales revenue,
margins and market share. Using analytical capabilities, they can leverage their own data and competitive data to
understand the competitiveness of the market. By establishing workflow based pricing processes, organizations can
bring in transparency, discipline and accountability in the function of price management.
By adopting multi-mode deployment strategy, an organization can service its different user segments in the best
possible manner. The price management solution will have a very small footprint, but can still benefit a larger user-
base. By establishing a bridge between the enterprise application and the price management solution, the entire
pricing process can leverage latest data from the enterprise application thereby significantly improving its currency,
which is very critical in the highly dynamic market environment.
Thus, the implementation of Price Management solution results in improved governance, quality and speed of the
pricing process, thereby providing opportunities to improve profitability and revenue. Fig 7 summarizes the benefits
of implementing a suitable Price Management solution.
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Leveraging Price Management to Improve Profitability
Fig 7: Price Management Improvement benefits summary
ImprovedProfitability
andRevenue
Improved Win-Loss Ratio
Organization Benefits
Business Benefits
Fast Pricing DecisionsConsistent Pricing Policies
Empowered Field StaffAbility to Leverage Intelligence Data
Holistic View of Pricing Data
Advanced Analytical Capabilities
Institutionalized, Integrated Process
Increased transparency and Accountability
Process Benefits
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Term Description
RFP Request for Proposal
KPI Key Performance Indicator
SOA Service Oriented Architecture
CRM Customer Relationship Management
ERP Enterprise Resource Planning
R&D Research and Development
SWOT Strength, Weakness, Opportunities, Threats
POS Point-of-Sale
B2B Business to Business
TCO Total cost of ownership
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Leveraging Price Management to Improve Profitability
List of Abbreviations
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All content / information present here is the exclusive property of Tata Consultancy Services Limited (TCS). The content / information contained here is correct at the time of publishing. No material from here may be copied, modified, reproduced, republished, uploaded, transmitted, posted or distributed in any form without prior written permission from TCS. Unauthorized use of the content / information appearing here may violate copyright, trademark and other applicable laws, and could result in criminal or civil penalties.
Copyright 2009 Tata Consultancy Services Limited
About Tata Consultancy Services (TCS)Tata Consultancy Services Limited is an IT services, business
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match. TCS offers a consulting-led, integrated portfolio of IT and IT-
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A part of the Tata Group, India's largest industrial conglomerate, TCS
has over 100,000 of the world's best trained IT consultants in 50
countries. The company generated consolidated revenues of US
$5.7 billion for fiscal year ended 31 March 2008 and is listed on the
National Stock Exchange and Bombay Stock Exchange in India. For
more information, visit us at www.tcs.com
www.tcs.com
To know more about how we help companies in the High Tech
Industry overcome their challenges and achieve real business
results, email us at [email protected]
About HiTech Industry Solution UnitTCS HiTech Industry Solution Unit comprises of Semiconductors,
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Professional Services. At TCS, we leverage our experience in
Engineering Services, Business Process Transformation, end-to-end
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