If there's one goal CIOs want to achieve this year, it's to help drive revenue. Some shrewd CIOs have found a little-known route to get there: Price optimization software.
Not familiar with it? I'm not surprised. Because pricing is such a closely-held business strategy, many companies don't want to confirm even using the software, for competitive reasons. But in fields like business-to-business manufacturing, chemicals, distribution, and industrial services, this software — provided by vendors including Zilliant, PROS, Vendavo and Rapt — is helping companies drive big improvements to top line revenue. Margin gains of 10 percent and profit enhancements of 15 percent or more are typical, according to Gartner data.
Because pricing is such a closely-held business strategy, many companies don't want to confirm even using price optimization software, for competitive reasons
The software, typically based on sophisticated statistical modeling techniques, slices and dices historical data (such as that from your sales process) to maximize prices for margin, using factors like the uniqueness of an item, or the fact that customers in a particular geography will pay more. Travel industry companies have priced this way for years, of course. But it's a big change at manufacturing firms like Acuity Brands Lighting, which sells a huge range of products, from industrial lights for commercial ports to streetlamps and home lighting fixtures.
Like many of its B2B manufacturing peers, Acuity had long used a "cost-plus" model for pricing: Figure out what it costs to make the product, then mark it up by a fixed percentage, says Pat Quinn, Acuity's VP of information systems and technology. This traditional approach "cheats" the company from realizing the best margins on many products, analysts say.
"You're always striving to keep fixtures from being a commodity like eggs," Quinn says. "Because it's a very competitive market, you're always asking 'How are we going to eke out that extra bit of margin?"
At Acuity, the executive team became concerned with price erosion in the marketplace about three years ago, as their prices and margins continued to decline. They hired A.T. Kearney to do some margin analysis, looking at prices of products across different markets, and gained some valuable insight, Quinn says. But he faced a big problem. "From an IT perspective, it wasn't repeatable," Quinn says. So Acuity sought out software that could do pricing analysis regularly, across thousands of products, and chose Zilliant for its familiarity with manufacturing customers.
Today, Acuity has dumped cost-plus pricing. "We try to understand the features the customer will pay for, then engineer it at a cost that provides the margin we need," Quinn says.
Using Zilliant's price optimization software (ZPPS Optimization), which is based on statistical modeling, Acuity can now determine the best price it can get for a particular product from a particular type of customer in a given locale.
Zilliant also helps the company understand, for example, that customers on the west coast would rather have a certain bundle of options than customers on the east coast, at a given price, Quinn says.
The new pricing helps across a wide variety of items, Quinn says, while declining to single out the biggest examples.
"Over time we became disconnected from the true market price of many of our 'fast movers'," Quinn says. "The change in pricing was subtle with great impact across the entire volume of products. Optimization provided us the ability to get our arms around our fast moving products, with the result being improved credibility in the market place, gross margin lift and transaction efficiencies."
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