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% and profit enhancements of 15% or more are typical, according to Gartner data.
“Nobody wants to talk about this software for two reasons,” says Gartner Research VP Robert Desisto. “First, it’s a competitive advantage. Second, it’s not the kind of thing you want your distributors or resellers to know about. The benefits have been so substantial that companies want to hold onto it as tight as possible.”
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.”
As for the financial results, Acuity’s operating profit margin has grown from 7.4 percent to more than 12 percent over the last two years, according to its quarterly reports. “A significant contributor has been our ability to price appropriately,” Quinn says.
Acuity is now using Zilliant’s Deal Manager software to integrate this analysis with its sales quotation system – which will give the salespeople the most up to date information and help the company optimize its margin on the spot for entire customer bundles, say lighting products for an entire building and a parking lot, Quinn says.
It’s important to note, Quinn says, that the push to acquire pricing optimization software at Acuity came from the business side. Business side colleagues approached IT to help find a tool. Quinn says he doesn’t think it would work for IT to drive a price optimization effort.
Gartner’s DeSisto agrees: Most of the successful deployments he’s seen have started with a desire from the business side. “Pricing’s a very sensitive thing,” DeSisto says. “It can’t be driven out of the CIOs’s side. You do it wrong, it’s going to really impact your business.”
Another good reason the push should come from the business execs: The idea of price optimization may be scary to sales and marketing, says Acuity’s Quinn. “They’re used to cost-plus.” And this won’t be a quick and easy improvement, he says. Just the analysis takes time. Feeding your data into a program like Zilliant will require some elbow grease, depending on your situation. “We had data in 30 different places,” Quinn says, from mainframes to AS/400’s to Excel spreadsheets. (The company has since consolidated its approach so that most of the data gets routed to Zilliant’s data warehouse via the Oracle eBusiness suite.)
Then when you do get to the pricing optimization stage, “You have to trust the models,” Quinn says. “You’re taking away what was an art – ‘I know what the prices should be in my market’ – and turning it into a science.”
Acuity’s change to its pricing approach has not only given the company a new advantage, but also helped drive better product development, says Lynn Brenton, VP Business Systems for Acuity. “It prompts us to look at the products that aren’t working,” with regards to margins, she says. And as Quinn notes, “It helps us kill the dinosaurs.”
In addition to Zilliant, major players in the price optimization space include PROS Software, Vendavo and Rapt, DeSisto says, with no clear leader among the pack. “They’re all growing,” he says. Each has some particular expertise with certain vertical industries, he says. For instance, Vendavo’s customers are led by chemicals firms. Rapt specializes in online media customers. Zilliant’s customers include manufacturing firms like Acuity Brands Lighting and Tyson chicken, distribution firms like office products wholesalers and distributors, and industrial services firms like Penske.
The continued appeal of this software category seems strong, says DeSisto. “It’s one of the few apps you can calculate top line revenue from,” he says.
So if you’ve got business-side colleagues whispering in your ear about driving revenue, you just might want to whisper “price optimization software” to them. Chances are, it’s an idea they may not have heard yet.