Why Pricing Should Be Done on More Than Just Instinct

Sometimes complexity is our friend. We tend to forget that in the barrage of talk about simplicity that surrounds us these days (blame it on the election year). Yet easy answers to complex problems are always, as H.L. Mencken once observed, “neat, plausible, and wrong.”

Consider a business function as basic as pricing your products. Once you’ve covered back-end costs and hit a desired profit margin, it’s a wrap, right? You’ve got an answer that’s neat, plausible, and—in this era of social media and fluctuating customer demand—probably wrong.

“Good pricing combines experience and gut instinct with data analysis, internal costs and external customer behavior,” writes Senior Editor Kim S. Nash in our cover story (“New Mission for CIOs: the Art and Science of Pricing”). “But to get there takes new technology and a new attitude.”

That new attitude needs to come from you, the CIO. That means stepping into the fray with your CMO or head of sales to offer fresh thinking about more advanced methods of evaluating customer pricing.

Our story tracks this emerging role CIOs are playing in pricing decisions at a diverse selection of companies, including Coca-Cola, Waste Management, Aspen Skiing and Dial Global, a radio syndication network. What they all have in common is reward and recognition for the strategic value IT brings to the pricing table. For some, that means combining statistics packages, revenue optimization software and social media feedback to figure out if customers are willing to pay more. For others, it’s about holding prices steady during a recession while offering other perks to increase services’ perceived value to customers.

“This is not about technology but insights,” says CIO Javier Polit of Coca-Cola’s bottling investments group.

“The financial returns associated with pricing initiatives far exceed any other IT initiatives,” says Puneet Bhasin, CIO of Waste Management, a $13.5 billion trash and recycling company. “It becomes a competitive edge.” Mathematicians and statisticians are part of a special decision sciences group in his IT department. Last year, their price optimization work yielded an extra $218 million (about 2 percent of revenues). “I’m not saying decision sciences pricing is always right,” Bhasin adds, but “it does better than supply-side pricing or pricing based purely on gut feel.”

So if you’re looking for the next strategic sweet spot for IT at your company, consider whether the price is right.

Maryfran Johnson is the editor in chief of CIO Magazine & Events. Email her at mfjohnson@cio.com.