Pricing Excellence Can Improve Profit

What is pricing excellence?  In our experience it’s a collection of processes, data science, and automation that ensures you have the right price at the right time for you customer.  Is the right price the best price for everyone?  No, it’s the price that balances your business goals against market conditions like when you want to maximize profit using price elasticity.  The right time means that your customers can get a relevant price in any channel they choose whether in a store, on-line, or through a partner eTailer.  Pricing excellence encompasses the ability to optimize your price and ensure that you can deliver those prices to your customers.

For me, my education about pricing excellence started many years ago in one of my first jobs at Trilogy in Austin, TX.  Trilogy was an energetic company with big ideas.  One of which was a ‘pricing engine’ that would dynamically price products, such as computers or automobiles, when a user selected options for the product.  It worked by providing a modeling environment where an administrator could construct the pricing calculations and conditions by which the product was priced without writing software code.

That certainly doesn’t sound particularly innovative today because it is common practice now, but back then many sales people would price in a spreadsheet or worse with a calculator and paper.  The new method did it automatically.  In working with different companies across industries, though, it highlighted that sales people and price administrators made mistakes when they manually calculated prices.  These pricing errors cost the companies money.  Interacting with these clients drove home how important it was to consistently give customers the right price and how important it was to institute a process to achieve pricing excellence.

I was describing pricing errors above, but when talking about pricing excellence many people automatically assume you mean optimization.  And, yes, optimization is a big part of pricing excellence, but the other component is reducing pricing errors and providing a foundation to be able to accept recommendations from an optimization process.  It’s like when I wanted solar panels and thought I could generate all the energy I needed.  Austin Energy would pay for a portion of it but they said they wouldn’t approve funding until I fixed the energy leaks in my house first.  I quickly found I was leaking more energy than I could ever generate, so set down the path of plugging those leaks.  It’s the old metaphor walk before you run and it holds true with pricing excellence as well.

After Trilogy, I continued down the pricing path at i2 (later acquired by JDA), wrote a pricing application myself and implemented it for metals companies, then worked as a consultant on a Lenovo eCommerce project.  Through it all, I saw that better pricing provided big benefits to customers.  Now, as a principle in DoubleBlaze, I know pricing is an area we can deliver significant value and set out to evangelize the message.  It is an area that many of our customers have yet to exploit.  Some are still using spreadsheets to manage prices and others have unreliable price execution.  Here are some examples of the opportunities that exist:

  • Pricing errors. A steel company I worked with found a 5% error rate in pricing on their invoices which translated to hundreds of thousands of dollars in lost profit.
  • Pricing efficiency. A leading retailer struggled to get prices out the door, often taking 4-8 hours and requiring hours of lost productivity to research the cause of the error.  Here is another example on how pricing efficiency affected a retailer.
  • Liquidating inventory. A customer of one of our technology partners found they could achieve their company goals of liquidating inventory while maximizing profit through better pricing  (will publish details later).
  • Increasing profit. Many years ago, a Harvard business review article Managing Price, Gaining Profit stated a 1% increase in price can yield an 11% gain in profit.  Of course there are a lot of dependencies such as your margin and demand but the point is – good pricing is important.
  • Driving revenue. AMR published a study that found promotions could drive a 1-12% improvement in revenue and a 5-20% improvement in margins.

These are just some examples of why pricing excellence is important.  Bottom line is that pricing errors leak profit and better pricing can improve profit.  Those two statements guide us when we work to deliver value to our customers.  In this blog, we will explore the techniques we use to determine if a company has a pricing problem, how to address the problems in a project, and finally how to lay the foundation for optimization.  I will draw from personal experience, our practice leaders experience, and partners to define the concepts and tease out the details.

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