Dynamic pricing, or charging based on customers’ willingness to pay, was once thought of as an airline gimmick, or at worst as price discrimination. The public consciousness’ shift on dynamic pricing is best exemplified by the ride-sharing behemoth, Uber. Steven Levitt, of Freakonomics fame, recently analyzed Uber’s surge pricing model to determine the UberX demand curve. In the working paper developed with several other economists, Dr. Levitt noted that even with Uber’s demand-based surge pricing, they were leaving $6.8 billion on the table in consumer surplus. Uber’s pricing strategy may need tweaking to capture some of those billions, but the preliminary results emphatically show that customers accept and appreciate a demand-driven dynamic pricing model, and that the inflexible pricing model that taxis use is woefully outdated.
Not every firm is Uber. However, any company can rethink their pricing strategy to drive revenue. The development of powerful price optimization and management (PO&M) tools has provided our clients with top-line growth. Using a digital PO&M solution allows companies to automate and facilitate the Inquiry-to-Order process, creating actionable data about purchasing behavior. As a result, PO&M is a hot trend. Unfortunately, the immaturity of the market is leading to consistent pitfalls in implementations. We at Trenegy have consolidated the struggles and pitfalls we often see into four key considerations that organizations must read before purchasing:
Understand Complexity and Timing
Implementing the right PO&M solution is a complex undertaking. Most firms have experienced the challenges of implementing ERP and other EPM solutions, and often those challenges are exacerbated by a lack of planning. Similarly, PO&M implementations require a robust planning phase to prepare the data integration and the underlying algorithms which enable dynamic pricing. The firms that achieve the least amount of value from their digital pricing solutions are the firms that expect it to be “plug-and-play.” Because of the solution’s complexity, companies must invest in training, change management, and defined roles and responsibilities to roll out a PO&M tool effectively.
Know Your Data
The process of streamlining and cleansing data required for pricing analytics is often the most pain-staking and time consuming activity of an implementation. Ensuring this is done correctly prior to go-live is paramount. All of our manufacturing and distribution clients have similar issues with their master data. Common pain points include: ERP data that does not align with business intelligence data, sales team price lists on outdated Excel spreadsheets that do not match contracts in the contract database, or budgeting tools that have different product roll-ups than the S&OP tool. Because PO&M systems pull from a variety of sources, key rationalizations must be made during the project’s design phase:
- What data, and at what level, does the PO&M system need?
- Which sources have this data and will it be integrated?
- Have you reconciled the source data at all levels?
Design a Strategy
Our clients seek a PO&M tool because their current cost-plus, absorption, or contribution margin pricing strategy isn’t capturing enough value. Dynamic pricing is a powerful business concept that can help grow revenue by up to 10%, but purchasing a PO&M solution without a defined dynamic pricing strategy is like leaving the engine out of your Uber LUX sports car. What drives the tool is the consensus between finance, sales, and operations: what will they charge for each SKU in each region while accounting for key dynamics like supply/demand, customer base, and sales promotions? All of these factors develop the algorithm that is the foundation of the PO&M solution.
Manage the Organizational Impact
Effectively implementing a standardized pricing strategy and solution relies on change management initiatives. Throughout the project, the team must develop clearly defined roles and responsibilities, process flows, and policies to align the customer-facing functions. After the tool goes live, the sales and marketing groups need to work together to leverage their capabilities to generate greater revenue.
Trenegy has assisted a number of companies with implementing effective pricing systems. For additional information, please contact us at: email@example.com.