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Price Optimization and the Pursuit of Value

Robert Irwin< Robert Irwin December 14, 2016

In observing the pricing space over the past decade, it is interesting to note how the language around the use of technology as an enabler of change has not altered, but the expectations of what that means have.

A decade ago it meant driving governance, compliance and control through the organization. We have Enron and the advent of the SOX compliance audit to thank for that.

User adoption and change enablement were part of a process of enforcement, rather than encouragement and cooperation.

Investment business cases were built with an emphasis on efficiency and accuracy. Case in point: one of Vendavo’s larger chemical customers had a 0.25% return on sales based simply on invoice price accuracy. Put another way, the price negotiated with the customer and agreed upon with sales was also the same one that appeared on the invoice. Due to their size, this 0.25% paid for the project and more.

Today, the expectations have changed in two particular ways:

  1. The demand for consumer-like usability of front end business applications has grown. Sales users expect the software they use to work as easily as any downloaded app. No training. No documentation. Intuitive design. Available on any device.(This is user adoption through ease of use. The user adopts the solution because it takes no extra effort for them to do so and moreover, they recognize the benefit. The solution offers a marked improvement on the way they work today. Why would they not use it?)
  2. While the C-Level continues on their journey to drive improvements in shareholder value and deliver a profitable return, they are running out of options of how to get there.

For a long time cost optimization ruled the roost, but the options have been used to the point of obsolescence.

Outsourcing. Offshoring. Lean Manufacturing. Just in time supply and invoice price accuracy programs. These were easy to measure—sometimes easy to achieve—but they have, for the most part, all been done. Some businesses tried growth through acquisition, but this often demands a premium and it does not guarantee results and success. Finally, cutting R&D does not make much sense. This should be avoided.

So what other options are there?

The pursuit of value in the modern marketplace runs through price and margin optimization—perhaps the most critical part of today’s pricing technology environment.

With such a system, organizations have the key capabilities to identify the drivers of value and define how much that value is worth to any given segment of the business. From there, price and margin optimization allows business leaders to guide the Sales team towards the successful capture of that value.

Access to performance data that simply wasn’t tracked before has resulted in the ability of all businesses to analyze and measure value derived from and delivered by all functions across the enterprise. Sales is no exception to this. You just need to want to do this.

These new developments in how technology and business software are designed and delivered to the end user is the vehicle that will take the pricing discipline across the chasm. It is the vehicle that pricing professionals—wherever they sit in an organization—can leverage to mobilize their talents and position the value of pricing optimization firmly into the boardroom.

As Patrick Reinmoeller noted in his study on C-Level attitudes to profit and margin, there is a desire and need to change. CFOs are still unsure how to drive an impact in margin outside of cost-out practices and they could use a little help. Price optimization is the most effective lever, combined with data proof points, that will deliver the confidence the CFO needs to look beyond cost-out as the strategy to improving profitability.

We see this happening now across the Vendavo customer base. Industry innovators are adopting value- based strategies and changing the way they set, negotiate and guide sales on the customer price decision.

Armed with the capability to deliver real-time insights and specific guidance to the Sales team, organizations are changing the way they not only set targets, moving to a segment-based approach, but also how they measure and pay their Sales organization based on performance relative to the target price.

At the end of the day, what does this mean for you?

As a Sales leader you will have the knowledge and confidence that your team will be supported, empowered and able to make fast, accurate and profitable decisions. They will be able to do what they are meant to do: negotiate and sell.

As the Head of Marketing you will be able to provide your team with the capabilities to translate highly differentiated marketing strategies and value positioning into effectively deployed tactics that make it all the way through to the field and are reflected in your price and margin targets.

And… as the pricing practitioner, this is all good news. An improvement in the overall skill level around pricing across the entire organization will drive cross-functional engagement and easier internal relationship management. You will be able to deliver the capabilities to drive pricing discipline and excellence throughout the organization.

In the continuous pursuit of value, the pricing team is now able to demonstrate the true value of pricing optimization. This is bound to get the attention of the business, all the way to the top.