New Mission for CIOs: the Art and Science of Pricing

IT leaders need to step up and provide the company with the sophisticated tools needed to make smarter pricing decisions, which lead to greater profits.

Cutting spending is nice; companies can always find something to do with the savings. But increasing product prices--if customers don't balk--brings in pure profit. The simplest way to price a product is to cover your back-end costs and tack on a predefined profit margin. But that formula ignores customer demand. And in this age of social media, tablet commerce and shopping by smartphone, customers demand that they not be ignored. Just as important, if companies don't figure out how to exploit a fleeting chance to fulfill a sudden customer need while pricing their product just right, they leave money on the table.

Whatever singer Katy Perry wears to the Grammys, for example, may inspire teen girls to buy knockoffs. So "fast fashion" retailers could temporarily notch up prices on--we're guessing here--sequinned minidresses.

Good pricing combines experience and gut instinct with data analysis, internal costs and external customer behavior. But to get there takes new technology and a new attitude.

"Pricing should be a CIO's issue by virtue of being an officer in the company," says Luis Rodriguez, senior vice president of IT at Dial Global, a radio syndication network that merged wth Westwood One in October. "But also because the business may not know there are more advanced ways to look at it."

Usually the CMO or CFO manages price optimization projects to try to increase profit margins, calling on the CIO only because IT has the keys to the corporate data, says Mark Ferguson, a management professor at the University of South Carolina. Ferguson studies how businesses formulate pricing strategy. It's rare, he says, for a CIO to instigate the process.

But that's changing. Airlines and hotels have long used data analytics for yield management, studying and influencing what customers do so the company can extract the most profit from transactions. Now businesses as diverse as Coca-Cola, Aspen Skiing resorts, and garbage hauler Waste Management are doing it, too. But they are going further, combining statistics packages, revenue optimization software and insights picked up from unstructured social media interactions.

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