Selecting Pricing Software Packages

Get a peek inside the black box before you buy

A company looking for a software tool to help it improve its pricing performance is these days

frequently confronted with a dizzying array of options and possibilities. To make sure that the

package that is ultimately chosen truly meets its needs, [COMPANY] recommends that

companies pay attention to seven key factors when making the purchase decision.

Choices. It is great to have them, but when the market is as diverse as the pricing software market is, then an already complex decision processes can quickly grind to a halt. When the pain is real, and the need is urgent, large sums of money can be lost due to inaction with no chance to recover them. With several of [COMPANY]’s clients, the results of addressing pricing deficiencies have been impressive:

• A major beverage company saw a 300% improvement in its quarterly bottom line due to a focus on pricing,

• A major package delivery company saw a $700 million profit improvement in one segment’s performance alone over 18 months by focusing on properly pricing its products, and

• A large chemical manufacturer identified almost $60 million in improvements with just ten weeks worth of effort.

With benefits like these lying on the table, companies can ill afford roadblocks to achieving these benefits. However, that does not mean that rushing decisions and projects is a good idea. Instead, companies must move intelligently in order to move quickly, and the first step is to understand what exactly is in the pricing space, and for what they should be looking in a technology solution

1. Develop a baseline of knowledge about pricing

For many people, talking about pricing brings to mind their consumer activities: shopping in a store, purchasing from a website, or maybe negotiating a car purchase. However, for most companies, pricing is a far more complex set of processes. Pricing touches everything from field sales to field service, from order entry to order fulfillment. As a result of this breadth, [COMPANY] has identified over eighty different functions within pricing, and has grouped them into eight capability areas. Over thirty of these functional areas deal with technology alone.

Figure 1. Companies should get an understanding of pricing before shopping for a technology solution

As one might expect, navigating across the broad pricing landscape can be challenging if one is unfamiliar with the terrain. As a result, a precursor to any package selection effort is to become familiar with the pricing space first. This can take several forms, from dedicated training sessions to intensive self-study, but in any case, learning the language of pricing will help not only speed up the process by making one more familiar with the jargon, but it will also help to de-mystify some of the concepts that frequently sound more sophisticated than they actually are. Once one actually has an understanding of the pricing space, then one can begin to determine where to start to improve performance.

2. Understand what problem you are trying to solve

While it may sound simplistic, you do have to understand what problems you are trying to solve ahead of time before selecting a solution. In a recent survey of the pricing software space, [COMPANY] identified over 40 viable pricing packages, but even the best software of them covered less than half of the functions that [COMPANY] feels are important in a comprehensive pricing solution. As a result, a company that is looking for a technology solution must be very careful in matching the packages’ strengths to the company’s problems.

• If you do not know where your pricing problem is, then focus on the analytical packages.

• If you need help determining the appropriate price to charge in a given transaction, then focus on the optimization packages.

• If you need help with negotiating deals or getting price information updated in a timely fashion, then look to a price execution package.

The worst mistake that a company can make is to select a package that does not address its core pricing problems. Getting significantly far down a path before finding out that you are attacking the wrong cause leads not only to lost effort (money), but also to lost opportunities (money).

3. Match the technology to your business

Once you understand what problem you are trying to solve, you must then understand how each package addresses that problem. In some cases, the approach that is embedded in the package will work well with your business, and in other cases, it will not. As a result, companies must look under the hood at any given package to determine how well it addresses:

• The problem the company is facing,

• The business environment in which the company operates, and

• The operational constraints it must consider when making changes. This is especially true if you are trying to solve an optimization problem. If your company only handles a few transactions a year with a product that is highly tailored to each customer’s needs, e.g. industrial machinery, then a program that optimizes price based on implied elasticity is probably not going to work effectively. Instead, a package that is geared more towards analyzing macroeconomic factors (e.g. modeling the demand for the end products, developing a total cost of ownership, etc.) is probably much more worthwhile. For a big box retailer, the opposite is true: its transaction systems should support many sophisticated analyses without having to resort to external data.

Figure 2. Optimization algorithms must match the company's business environment

4. Make sure the scoring process addresses the business issues

One of the most effort-intensive aspects of evaluating any software package is putting together the list of prioritized business requirements. However, all too frequently, selection teams do not put the same level of care into designing the scoring methodology itself. As a result, some requirements/functions have a much larger impact on the overall decision than their relative business importance would suggest. An example:

Requirement Priority Package A Package B

Fit Score Fit Score

Price products more profitably than we do now

3 3 9 1 3

Ease of use 2 1 2 3 6

Browser-based client 2 1 2 3 6

Total 13 15

Figure 3. Improper scoring methodology can distort the business significance of some features

In the example above, ease-of-use and technical features override the business issue of whether or not the package actually works. While this would be easy to catch in such a short list, requirements lists frequently get large, and due to internal political reasons, are also frequently not as compact as they should be. As a result, distortions do occur and in some cases, the best fit for the business is not chosen. The keys to preventing this:

• Scrub the requirements list thoroughly so that each requirement is largely independent of all of the others (academics call this discriminant validity)

• Determine scoring guidelines ahead of time that indicate what a particular score would look like for a given requirement

• Perform scoring simulations to make sure that certain areas or functions are not unintentionally over-represented

5. Design in change management from the start

As most executives know, technology is merely an enabler. People will ultimately be doing the work, and it is those people who will make or break any new system. As a result, it is important to plan for some of the major change issues up-front, and then deal with them as the project progresses, rather than let an opposition, loyal or otherwise, get a chance to organize. Some of the common issues that companies will face:

• Resistance to the perceived impending loss or autonomy to “do the deal”

• Anxiety over new measurement systems to which people will be held accountable

• Loss of productivity for having to learn a new tool

• Confusion among customers over changed policies and procedures The most enticing mistake a company can make is to use the pricing tool as a club for the finance department to use to beat up marketing and sales. The consequence of this can be an expensive exodus of sales talent that can cripple a company’s performance. Communication should occur early in the process, and should emphasize the upbeat nature of the project. Pricing improvement is one of the easiest corporate changes for which to get support, if only it is positioned correctly.

6. Look for experience beyond the confines of your industry

Since many of packages in the pricing space are relatively new, companies with strict industry experience requirements may be disappointed in the amount of experience many solution providers have in a given industry. Pricing is largely broken across most industries, and unless you are in the transportation or hospitality industries, two traditional strongholds for pricing, you will be hard-pressed to find excess qualifications in any one industry. In order to find the best fit, the selection team must frequently fill in the gaps in industry expertise that the software provider lacks. This puts an enormous burden on the selection team during vendor demonstrations as they must look beyond the jargon and really focus on what is being displayed. As most software vendors will attest, the demo will generally win or lose the deal, so it is important for the selection team to be especially vigilant when looking at demonstrations of products that are not “native” to their industry. Besides, cross-pollination of pricing ideas is one of the important side benefits of conducting a pricing selection.

7. Do not expect a silver bullet

As has been mentioned before, a pricing package is just a tool. It will still be up to people to use it. If the problem is complex and intractable, then technology will generally not be able to increase the speed of the solution. It will merely speed up some of the steps in between the existing roadblocks. In fact, many companies should not attack their most difficult and pressing needs directly out of the gate. Instead, companies can oftentimes get easier, faster results by focusing on smaller, but more manageable issues while they get their heads around how to resolve the larger issues. In this way, tools can be introduced into the corporate environment in a way that becomes self-funding and self-reinforcing. So-called “quick hit” projects provide immediate returns to the bottom line, while the people in the company learn how to use a new tool and about how to address the market in a different manner. Since successful change can be positively reinforcing, as people achieve success in dealing with the smaller-scale pricing issues, the problems of

getting people to accept new solutions for the larger issues decreases. Ultimately, once hairy, intractable problems can become quite manageable with a good track record of successful change sitting behind you.

Conclusion

Selecting a pricing software package is not really that different from selecting any other corporate software package, at least not on the face of it. However, given the lack of familiarity with pricing issues most companies have, it behooves them to pay special attention to some of the “gotchas” that are peculiar to the pricing area. If the selection team falls into some of the pitfalls of selecting a pricing package, then the results can be “less than optimal”. However, if the people selecting the package choose wisely, then a smooth implementation and reaping of benefits can definitely follow.