Get Ready: Price Optimization is Coming Your Way -- And It's Looking for Your Data
If your company sells through a B2B sales force, sooner or later you'll be asked for a price optimization and management solution. Here's how data analytics can help.
By Neil Lustig, CEO, Vendavo
If you haven't already heard the term PO&M -- which stands for price optimization and management -- you soon will. According to a recent Gartner report (see Note 1), PO&M is grabbing attention in the executive suite because it can boost margins, revenues, and profitability. A successful PO&M implementation can increase margins by 50 basis points or more and increase revenue by two to four percent. That puts PO&M on the executive agenda, and it puts your data resources on the spot.
If your company sells its products and services through a B2B sales force, chances are that sooner or later you're going to be asked to deliver a PO&M solution. To help you prepare for that moment, here's what you need to know.
P is for Profit
Though the "P" in PO&M stands for price, it means profit: profitable selling at the "moment of truth," when the salesperson with the laptop takes a deep breath, names a price, and asks for the business. That's the moment profit happens.
Profit depends on multiple small decisions that happen at the point of negotiation, such as the ship-to location, the terms, and the fuel or service surcharge. It's too much for a salesperson to figure out on the spot, so historically, companies have only been able to calculate profit after the deal is done -- not at the moment of truth.
With PO&M, you'll need to provide sales information on the emerging deal in real time, leveraging your data to deliver profitability data, deal guidance, and price-approval management -- all at the moment of truth in the customer's office.
It's All about Data
PO&M implementations need data, data, and more data. Your company will want its PO&M system to access and analyze transaction, social, geographic, and competitive data, searching for insight into what drives value or correlates with profitability. Your analytics tools must distill that data into accessible, actionable, real-time information on which products deliver the most profit; how items such as freight, warranties, delivery time, and support agreements can make or break margins; and what prices competitors are offering. Salespeople need this information at their fingertips in client meetings -- along with in-depth information about customers, such as changes in buying patterns, upsell and cross-sell opportunities, price sensitivity, and rebate status.
To transform big data into these actionable assets, you need to capture and analyze it. Only then can you optimize your front lines by arming sales with deal guidance, profit opportunities, and dynamically optimized pricing. Your objective is to help your salespeople negotiate from a position of strength, with solid real-time target pricing and guidance on the "walk-away" price.
Your Mission: Inject Science into the Art of Sales
Even stellar salespeople cannot and should not make million-dollar decisions based on instinct. Studies show that predictions based on "gut feel" are accurate only about 40 percent of the time. Pricing optimization technologies infuse the art of sales with science by encoding corporate experience into algorithms and applying them across massive data sets to yield predictions of customer behavior.
When your company's salespeople call prospects, those prospects are likely relying on state-of-the-art procurement systems that leverage big data to extract the best possible prices. To keep field sales from being outgunned, your business must leverage its own enterprise big data, using software to set a comprehensive, scientific strategy for achieving profitability, every time.
Optimize Prices for Profitability
According to the MIT Sloan Management Review, "small variations in price can raise or lower profitability by as much as 20 or 50 percent" (see Note 2). When you think about how critical it is to set prices effectively, it's hard to see why so many businesses leave this entirely up to the salesperson. Some 60 percent of sales reps prepare their own quotes and more than half also determine the price. They're relying on instinct -- but data trumps instinct every time.
A cornerstone of profit optimization is scientifically setting "target prices" that will deliver the optimal profitability for each transaction. These prices must take into account the pricing power the business has in a given segment and the risk to volume of a price increase. The result is guidance in the form of a score for each line item, as well as for the overall deal, based on discounts and terms. In effect, this serves as a "guardrail" for the salesperson during a customer negotiation, ensuring maximum profitability on each deal. By getting optimized prices to the sales team, your company can gain a greater than twofold margin lift compared to deals based on analytics or price setting alone.
If You Can't Deliver the Perfect Answer, Deliver the Next Best Thing
Your data is not perfect, but that doesn't diminish its usefulness. Use the best data-analysis tools you can find and let salespeople or marketing staff load it with the best available data. It's all about getting started and enabling constant improvement.
Keep Your Foot on the Gas
Pricing strategy is not a "set it and forget it" business component. It's necessary to constantly revisit and reassess the strategy. Companies must keep a finger on the pulse of wins and losses, unprofitable deals, and competitive activity. Your pricing optimization systems should actively look for opportunities all the time and push salespeople to ask for even more profitable deals -- even if it's uncomfortable for them.
A New Take on Profitability
If your company manages price optimization through internally developed spreadsheets and database tools, it can do a lot better. With the increasing sophistication and capacity of PO&M, it's time your company ramps up its profitability with a more analytical and informed approach to pricing. PO&M is going to pose a challenge for your data and your organization, but now when you get that memo from the C-suite, you'll be prepared.
1. "MarketScope for Price Optimization and Management Software for B2B: 2013," Gartner, November 25, 2013, page 1
2. A. Hinterhuber and M. Bertini, "Profiting When Customers Choose Value Over Price," Business Strategy Review 22, No. 1 (Spring 2011): pp.46-49; http://sloanreview.mit.edu/article/is-it-time-to-rethink-your-pricing-strategy/
Neil Lustig is the CEO of Vendavo, a company that specializes in helping enterprises optimize their profits. You can contact the author at email@example.com.