Pricing technology: a journey, not a destination

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Finding the right approach — We live at a time of incredible choice with regards to software applications. With the growth of cloud-based technologies, there has been an explosion of vendors and solutions to choose from. At the same time, unlimited choice can be crippling as well, as it can complicate selection processes. Any technology solution must be selected in the context of the overall IT environment, or risk being rejected by users, IT or both.

Rallying organizational support — If your company is like most, an abundance of corporate initiatives have required extra attention and effort from your people. Given that there are still only 24 hours in the day, employees often must invest nights and weekends to support the latest corporate program. As a result, introducing a new initiative, even one with obvious and compelling benefits, will require internal selling and use of political capital to get commitment and engagement from a cross-functional team including sales, finance, marketing and others. Even a best-in-class system will die a quick death if it is rejected by your people.

Building supporting infrastructure — Prices and price options are intrinsic to the commercial interaction with customers, and so any change to pricing tools or processes will need to connect in some way with your IT infrastructure. At a minimum, this may mean uploading price lists generated in Excel into your ERP. On the other end of the spectrum, this may mean developing interfaces and workflows between your pricing technology, your databases, your ERP and your CRM systems.

A challenge on several fronts There are numerous hurdles to clear as companies embark upon this journey. Many solutions have been introduced just in the past 5 to 10 years that have the potential to complicate the decision process, including a wide variety of software as a service (SaaS) and cloud-based technologies that can be purchased without assistance from IT. On the other hand, because pricing is tied directly to customer interactions, your pricing technology has to interact with your enterprise systems at some point, even if that interface is through manual transfer of data from one system to another. And so your preferred approach may appear to be simple at first, but it may still require added IT support, possibly around the clock, and may have unforeseen IT requirements.

To reach the needed level of integration and alignment, companies typically must confront three categories of challenges:

Pricing technology: a journey, not a destination When bringing products to market and serving customers, businesses have more technologies to choose from than ever, and an unprecedented amount of data to put to use. In the current market conditions of greater competition and more demanding customers, pricing technology has emerged as an area of growing interest due to its potential to help companies to grow margins through automation and optimization of pricing. At the same time, in a cluttered marketplace of solutions, with new options and concepts being introduced every day, finding the right approach for your business to realize these benefits can be a significant challenge.

At the same time, this is a challenge that can be addressed effectively, especially if companies start with the right perspective. Rather than seeking the “right” answer, it can be more productive to think of your pricing technology choices as a journey with multiple paths and multiple destinations depending on the needs of your organization. And the journey can be incredibly rewarding — with increased profitability, customer satisfaction, process efficiency and market share growth — even before you reach a destination.

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2

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Finding the right approach• Review multiple solutions and strategies• Consider in-house vs. outside provider options• Align organizational goals with output

Rallying organizational support• Secure sales team buy-in• Develop an analytics capability• Create an IT support team

Building supporting infrastructure• Identify IT infrastructure improvement needs• IntegratewithCRM,ERPandconfigure,price and quote (CPQ) technology• Clearlydefinekeyperformanceindicators

Challenge Goal

Prevent wasted investment

Eliminate internal dissension

Avoid unforeseen IT gaps

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Find the right path for your journey Successful implementation of pricing technology requires your price strategy to be considered first — i.e., what are you trying to accomplish with your price? Secondly, it is important to have a good understanding of your pricing processes, and where these need to be improved vs. where they need to remain untouched. Failing to consider these elements can mean the difference between a successful initiative and one that can’t deliver as promised.

1. Price strategy Price strategy sits at the center of it all and drives everything else. Some companies make the mistake of selecting a technology and trying to form a strategy around it — and they end up paying more than they wanted to for a capability that does less than what they need. Instead, your strategy should inform your chosen technology, so that the economic factors underpinning that strategy are addressed.

Most companies employ one (or more) of the following price strategies, and each will come with associated implications for technology choices.

3. Technology All these considerations culminate in determining the technology you need and how it should be implemented. Your desired outcomes will help drive the requirements for the new solution — one that makes sense for what you want to achieve immediately, and also enables your continued journey in case your target destination may change.

Desired outcomes may fall into the following categories, each of which will suggest different supporting capability requirements.

2. Pricing process It is also critical to examine what your pricing process looks like and where it needs to improve. The goal is to determine the pain points and what you are trying to optimize, making it consistent with the needs of your organization. Your decisions should be driven by the key steps in your process and how well they function:

How you set list prices. This can be a challenge, especially for large online retailers who sell thousands or even millions of products. Do you know where list prices are competitive, or where they’re helping or hurting you? Are you able to evaluate your price performance histories and leverage that information?

How you design discounts and promotions. For other companies, such as distributors, discounts and rebates are an enormous part of the process. Can you tell where these price concessions are making the most impact, or whether your efforts are successfully targeting a key customer segment?

How you execute sales. It is crucial to get the right price in the hands of salespeople when they need it, typically when they are in the field with customers. How can you enable that real-time visibility into suggested prices that are matched to individual customers? And can you identify where your sales force has opportunities to capture greater revenue or margin?

prom

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2. D

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1. List price setting

3. Sales execution

4. B

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ent

Value-based pricing

Pricing based on economic value created for the customer

How to measure and track value for the customer

Pricing based on market supply and demand

How to track competitor prices

Pricing based on cost to produce solution

How to maintain up-to-date and accurate cost information

Market-based pricing

Cost-plus pricing

Effciency, visibility and governanceAutomated tools and workflow with audit trail, designed with visibility and accountability

List price/margin optimization, designed with performance metrics identified

Predictive and prescriptive analytics, designed with robust modeling and real-time integration with transactional system

Improved price performance reporting

Scalable platforms to support future needs

Desired outcome Supporting capabilities

5

Options for pricing technology

Most companies consider three options, depending on current capabilities, goals and budgets. And it’s not a matter of choosing one and then being locked into it — these options can be thought of as steps on your journey. Determining where you start on your journey can be as important as the path that you decide to take.

• Enhancing current tools — Most companies have Microsoft Excel, Access and SharePoint, but many do not think of them as effective tools for pricing. While they have definite limitations, this is an affordable option and can be a promising initial step for those just setting out on their journey.

• Scalable point solutions — This more sophisticated approach relies on statistical packages like SAS, visualization tools like Spotfire and Tableau, and CPQ solutions from any of a wide variety of vendors. It offers more customization but requires more evaluation and more middleware to connect the varying programs (some of which you may have already).

• Enterprise pricing software — These comprehensive suites, including PROS, Zilliant and Vendavo, are developed by people whose primary concern is pricing. Such one-stop shops are powerful and robust but may be too much for those who don’t need this level of power — the costs are steep, and so is the level of support required.

Each option is discussed further in the next section.

You may be surprised that common desktop programs can handle complex pricing tasks, but they are being used to do so every day across Corporate America, including by large multinationals. It’s a fast, inexpensive option with a short learning curve. For those looking for that first step in a learning journey to find insights, these common programs are very viable.

The drawbacks: There are limits to the amount of data these tools can manage, and they are very open to errors from manual input. The process can be cumbersome and inefficient — version control errors can crop up, and there is no audit trail.

A real-world example: The utilities industry has very narrow margins, so a leading company in this sector wanted further insight into optimal bundling and pricing structures for its new offerings without investing in additional tools or software.

The company leveraged the following process:

To collect cost drivers for the price floor and determine customer value drivers for the target price, the company used Microsoft Excel for modeling and creating spreadsheet tools for salespeople to communicate its new value proposition. The spreadsheet tool was used to provide real-time decision-making for sales to use on every new deal.

Lessons learned: Using existing desktop applications can be a great way to develop your business logic and decision rules for pricing — it’s essentially learning to walk before learning to run, and can help you to sell the value case for further investment. Even if you decide to implement more sophisticated technology solutions down the road, vendors will typically ask for your pricing process, rules, governance and metrics in advance. Using desktop applications to develop these beforehand can save both time and money that would otherwise need to be spent with consultants and vendors.

Option 1: Enhancing current tools

Determine pricing strategy Align pricing strategy with business objectives

Obtain a clear understanding of our cost basis and value to customer

Develop cost structure

Align pricing with financial goals and segment value strategySimulate fnancial impact

Enable real-time decision-making on every dealImplement pricing tool

Stage Objectives

ERP

Pricing managers

Pricing data entry templates

Pricing administrators

Pricing database

76

Option 2: Scalable point solutions Option 3: Enterprise pricing softwareSpecialized vendors have emerged that have developed powerful platforms to use in environments where pricing is particularly complex and dynamic, such as airlines, retail and distribution. For example, if you have millions of prices that are constantly changing, having a dedicated external companion offering a solution that can manage this level of robustness and with deep expertise can be ideal.

Lessons learned: A custom solution can be the most powerful option for any given company. For an organization that has already invested heavily in one aspect of the technology stack — in this case, the statistical pricing model — and wants full control of this model for the foreseeable future, a custom solution may be the only answer. It is important to understand that a custom solution will require significant ongoing investment to maintain, improve and upgrade. Other issues, including training, knowledge management and licensing, will also continue to arise.

Lessons learned: It has been said that a journey of a thousand miles begins with a single step. In the case of this company, that first step — the data model — required 18 months to establish. Depending on the complexity of your business, data quality can be an enormous hurdle to clear. For some companies, it can take several years to establish data quality, train people to use the data, and then earn trust in the data such that it is used to make critical decisions. It is incredibly valuable to solve for as many of these types of issues — such as data, process, governance and metrics — before engaging with vendors or consultants.

Determine pricing strategy Enable real-time data availability

Produce insights on price performance by product family, customer group and more

Develop cost structure

Enable hand-over success and change management support

Create custom dashboard

Establish analytical database within IT infrastructure

Deliver the tool, training and user guide

Stage Objectives Determine pricing strategy Enable creation of price lists that are updated dynamically

Enable delivery of appropriate price lists to customers

Develop cost structure

Create visibility into price performance and optimize prices

Enable delivery of prices in SAP

Establish data model

Enable price optimization module

Stage Objectives

If you have the technology and the IT support, implementing market-leading point solutions can be the most powerful solution of all. Such applications and systems as shown above — some of which you may already be using — can be integrated to work in unison, providing an entirely customized solution that is optimized around your business.

The drawbacks: Because this is not a “one-stop shop” solution, you will need to manage multiple software vendors in order to build and maintain your system. This can create issues with regards to upgrade and negotiation cycles, and if your organization decides to move away from one or more of these vendors, it can create a gap in your solution stack. Creating this system will also require middleware so that the programs and systems can interact properly with each other. Because of these requirements, you will need support from your IT organization for as long as you operate this system.

A real-world example: A life sciences company had a robust pricing model that was driven by a sophisticated statistical model, but it wasn’t able to deliver these insights to its sales force in a timely manner. The company connected its statistical package to a new visualization software tool and developed a custom dashboard to quickly provide insights on price performance by product family, customer group and other factors. This tool enabled real-time insights for salespeople in the field.

The company leveraged the following process:

The drawbacks: Such solutions are pricey and may take a long time to implement, and are reliant upon robust current-state processes and data. They also require a vendor support structure, and so you have to be ready to sign up for a long-term relationship. You don’t want to go down this road and discover that a less-intensive option is more appropriate, and reversing course after paying for a software implementation of this magnitude can often cost executives their jobs. A real-world example: A global manufacturing company needed to incorporate an acquired company into its existing solution architecture, which included SAP and PROS, and wanted a complete integration process with a pricing solution. It incorporated data models from the acquired company into PROS and implemented a margin analysis module, allowing it to report on price performance for the new product portfolio.

The company leveraged the following process:

Enterprise ERP solutions

Oracle SAP

Salesforce

Specialized solutions

Salesforce Firepond

BigMachines Vistex

Salesforce

Pricing solutions

Zilliant PROS

Vendavo

Sample solution vendors

tools

Visualization

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Conclusion: Multiple paths to pricing excellence

Your goals may be to use analytics to make better pricing decisions, to optimize the efficiency of your process, and ultimately to customize offers in real time based on the customer context, product availability and where to maximize margin. Achieving those goals is part of a journey — one that doesn’t have the same jumping-off point for everyone or a rigid itinerary from step to step.

As shown above, you can follow a self-directed path to reach those goals. Greater profitability, efficiency and customer satisfaction can be achieved as you proceed — as long as you continue to make learning a priority as you travel along the path.

ContactsBernard Kang Senior Manager, Performance Improvement +1 212 773 2699 bernard.kang@ey.com

Joseph Lackner Principal, Performance Improvement +1 312 879 3744 joseph.lackner@ey.com

Daniel Bracke Manager, Performance Improvement +1 312 879 3879 daniel.bracke@ey.com

Sales toolsAnalytics, reporting, optimization tools

Mar

keti

ng

prog

ram

tool

s

Improve system performance

Enable price list generation

Enhance web, mobile UI to enable field personnel

Enable analytics dashboard using

enterprise-level tools

Implement price and deal

optimization software

Implement basic analytics using

desktop-based tools.

Develop prototype price models using

enterprise-level tools

Implement marketing

program software

Create data-driven program effectiveness

model Integrate pricing programs, CRM, real-time, optimized offers

Develop predictive models leveraging

multiple data sources

Handheld order management, self-service portals, etc.

Develop prototype price models in

desktop-based tools.Pri

ce

man

agem

ent

tool

s

Dynamic program and discounting

execution

Real-time visibility to

availability and tailored product recommendation

Vision:Dynamic pricing, product and offer

development

Optimize share and margin through custom offers

Starting point

Leverage deep customer insights

Efficient programexecution

Sample pricing journey

Sales toolsAnalytics, reporting, optimization tools

Mar

keti

ng

prog

ram

tool

s

Improve system performance

Enable price list generation

Enhance web, mobile UI to enable field personnel

Enable analytics dashboard using

enterprise-level tools

Implement price and deal

optimization software

Implement basic analytics using

desktop-based tools.

Develop prototype price models using

enterprise-level tools

Implement marketing

program software

Create data-driven program effectiveness

model Integrate pricing programs, CRM, real-time, optimized offers

Develop predictive models leveraging

multiple data sources

Handheld order management, self-service portals, etc.

Develop prototype price models in

desktop-based tools.Pri

ce

man

agem

ent

tool

s

Dynamic program and discounting

execution

Real-time visibility to

availability and tailored product recommendation

Vision:Dynamic pricing, product and offer

development

Optimize share and margin through custom offers

Starting point

Leverage deep customer insights

Efficient programexecution

Sample pricing journey

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