Manufacturing Executive - November 2008 - (Page 27) make for impressive revenue and margin improvements, an investment in price management technology does not come cheap. According to Tohamy, the up-front investment in pricing software is “typically upward of $1 million.” In recent months, Tohamy notes, that figure has given manufacturers pause, as the weak economy shrinks sales and management scrutinises capital expenditures more assiduously. Yet, when higher material and labor costs paint manufacturers into a corner, pricing “might be the only lever to improve profitability,” she says. “In the down economy, there’s more motivation for user companies to really understand how they’re pricing.” In a summary accompanying her research report, “Pricing Optimization in a Down Economy: Mandate for Growth or Ill-Timed Choice?” THE PRICE OF BETTER PRICING Tohamy writes, “In an economic slowdown, Research by consulting firm Deloitte shows that establishing fact-based pricing helps sales orusing price management software to buttress ganisations maximize margin realization in every change management efforts can have a subtransaction.” stantial payoff. Schneider Electric is one company that did In a 2006 research paper titled, “The Pricing not wait for economic weakness or a constricting Myths that Could Be Holding Back Your Profit,” market to kick-start its pricing strategy. The Deloitte’s Laura Preslan and Ranjit Singh demaker of automation systems and the popular scribe a Fortune 50 consumer goods maker that Telemecanique and Square D electrical prodcreated target sales prices for each product — ucts installed a centralised pricing department in only to have them ignored by the sales force. its North American operating division more than When their requests for pricing discounts were 20 years ago, says Neal Lyons, who heads the denied, the salespeople would simply dip into unit today. trade promotion allotments to make up the Even before the advent of specialised pricing difference and cut the price. Researchers said software, Schneider’s 40-person team of pricing the practice led to a 6% year-over-year drop in specialists practiced the three tenets of price profitability. management: analysing pricing policies against Preslan and Singh cite an industrial manufacmarket data and internal intelligence, optimising turing company whose market research showed product prices based on those analytics, and ena 50% price variance for the same product in a cerforcing the optimised prices through sales force tain region and among the same competitors. management practices. The company issued new pricing guidelines to its Not long after the new wave of price management software emerged earlier this decade, Manufacturers that take advantage of price Schneider North America sought out the techmanagement software can reap 10% to nology. In 2006, Schneider selected Zilliant’s Precision Pricing Suite and rolled out the soft20% margin improvements and a 3% to ware in just six months. 10% bump in revenue. — AMR’s Tohamy “We went too fast,” Lyons admits. In their haste to use Zilliant’s Analytics and Optistaff and raised its price 12%. “This improvement mization modules to assess their pricing methods resulted in more than $19 million in benefits and determine the optimal price for products, while driving a 1% increase in year-over-year volthe team included some erroneous data and inume,” they write. sight. Revising the data models pushed the projManufacturers that take advantage of price ect back half a year. management software can reap 10% to 20% margin “We should have tested some of these modimprovements and a 3% to 10% bump in revenue, els,” he says. “My advice would be [to] do all that according to Noha Tohamy, research director of up front. Don’t rush to push it out.” AMR Research. With the data models cleaned up, Schneider Although the science behind the software can North America began to use Zilliant’s Deal ManNovember 2008 PROS, which traces its roots to 1985 and operates out of global headquarters in Houston. The larger enterprise software vendors have taken notice of this growing area of interest. SAP in 2005 tapped into its vast partner ecosystem to resell software from one of the market leaders, offering SAP Price and Margin Management by Vendavo. SAP’s main rival, Oracle, is navigating a triedand-true acquisition path, having bought pricing specialist Revenue Technologies in 2007. “Oracle’s strategy is to deliver by 2009 modules under the price management brand that address price analytics, price optimization, and price execution functions for E-Business Suite and Siebel,” wrote Gar tner analyst Michael Dunne in a recent research note. 27
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