January 19, 2004   |   Palo Alto   |   Jim Ericson — More than two years ago, we began writing about dynamic pricing tools and the value they potentially hold to business, especially in settings where margins are thin and top line growth has slowed.

This wasn't about reverse auctions, it was kind of the flip side of that story, and set in a more traditional field sales setting. It's a fact that in retail or commodity manufacturing settings where price and service levels are the only available points of competitive differentiation, pricing often holds the key to survival. The equation is simple. Michael Marn of McKinsey Group has written that moving profit margin 1 percent can move revenue by up to 11 percent.

Moving profit minimally via spreadsheet automation and analytics has been shown to have a huge effect on operating margins, and we found evidence long ago of solid business cases and efforts under way to address better pricing solutions.

Two years later we're scratching our heads and wondering why we aren't hearing more from this space. True, many businesses keep mum on pricing strategies since this is competitive information, but from what we hear, the world still runs on spreadsheets and multiple silos of data. "There's a big difference between what companies should be investing in and what they are investing in," says Laura Preslyn, research director at AMR. "Every company can benefit from improved pricing processes."

Pricing Problems
Essex Electrical Products is a $300 million public company that sells electrical building wire and related products. With products that are commoditized and sold through manufacturer rep channels, pricing is flat-out essential to operating margins.

"Besides price, which we are extremely sensitive to, on top of that it is an industry dynamic that is dominated by what I call relationship bias," says Brad Thomas, VP of sales at Essex Electrical Products. "Relationships with manufacturer reps are extremely important, and what that relationship gets you is what we call last look, because we're always pricing to the market."

Essex sells in typical open-ended quoting settings where a distributor will get prices from as many as four different wire companies. Competitive information is generally pretty visible, but on a deal basis is based on information that comes back from the rep in the field -- whose only motive is to sell something. If he doesn't sell anything the rep doesn't make any money, so it's not necessarily conducive to him to get a higher price. He just wants the order.

Essex has used a manual approach in which every single inquiry is called in to its offices for pricing. "Basically there's a small group of people that do that," Thomas says. "But you get caught up, back to the relationship thing and the people side, the emotion of the moment. And what we're trying to do is for our basic day-to-day flow of business, take that emotion out of it."

After some careful shopping, Essex has recently signed on with a company called Metreo, one of the specialists in a field of pure-play vendors. Improving margins on its commodity products will be a goal, but even more so than that, Thomas wants to get the pricing process out into the field, not to remove the human element, but eliminate some of this bias he talks about when interacting with the sales channel.

"Let the system do it, it will do it smarter, quicker and based on a systematic analysis as opposed to an emotional analysis," Thomas says. "We'll only get the people involved when it goes beyond that for strategic reasons."

Unlike the high-tech electronic parts industry, where fast quote turnaround is the critical element, Thomas doesn't usually mind if the process takes an hour or a day. More important is to allow reps the ability to make decisions in the field based on business rules for customer classes, specific products and regions. "I've always said the person that lives in the territory and is working it every day knows a hell of a lot more about what's going on and what's important to his business than we do, and this gives us the opportunity to give him the tools to make some decisions," Thomas says.

For Essex, Metreo will collect and store data and provide a mechanism to analyze that data, spot trends within territories, within customers. Essex is already drowning in data of course; but it takes a lot of work to put that to its best use and the value of spreadsheets is directly related to the skills of those who manipulate them.

How Pricing Solutions Work
There is a mostly unfamiliar class of vendors specifically associated with this space that work in different ways: Metreo, Azerity, Rapt, Vendavo, Maxager, Selectica, and Revenue Technologies are all brands with recognizable clients, whether or not they step up to the podium for their partners.

It was only three or four years ago that such tools hit the market, and back then the story was e-commerce, and so early efforts were to configure products for sale online.

"We also went from there straight into pricing knowing that you not only have to sell products in the right configuration but you also have to price them," says Paul Nagy, VP of marketing at Metreo. At the time, Metreo was as bleeding edge as anyone, but in a time when sales were growing 30 percent, nobody got the message of bringing an 8 percent greater margin. "People like Cisco couldn't build things fast enough to rein in all the money people were throwing at them," Nagy says.

The economic downturn that followed was also tough for Metreo to weather but today it's a lesson because companies still want to sell more product but they can't depend on volume alone.

As the space has come along, there are different vendors that handle pieces of the puzzle. For instance, Siebel and SAP have pricing tools that use business rules for different discounts for client classes. Other vendors look at price visibility and provide a dashboard to show how well or poorly current pricing is doing. Still others do price planning, how to set a better price. Unlike the limited tools from ERP vendors and applications like Siebel, a company like Metreo claims to do all of the above.

"Metreo Insight is about price visibility, Nagy says. "And then once we set a better price and understand how it is performing, we want to put this into action. That's called price execution and we call that product Metreo Response."

In use with a single data repository that all market research groups call requisite for all sorts of data management and analysis, such systems are a big improvement over divisional or departmental sales efforts, and give better visibility and alignment with corporate goals.

That's Thomas's plan as well. "When we price right now, we set our parameters for our pricing people on a daily basis, based again on what our plan is for the month, our inventory looks like, where we stand today in terms of margin and volume, in accordance to those plans. We'll continue to do that but put that into the system and let the system manage it."

AMR's Preslyn agrees that such closed loop tools are a considerable improvement over tag-along tools products from larger vendors. "A lot of companies have tried to use some of the glorified price list management that exists in some of the ERP and other products," Preslyn says. "It's just not delivering the value, it's not helping them optimize win/loss analysis to figure how they can price to close more deals. It's not helping them figure out where in the bill of materials their margin is leaking out."

Rather, such tools just take a number from a spreadsheet process and distribute it to salespeople without a lot of workflow for actually enforcing it. One of the most interesting metrics that's emerging, Preslyn says, is the number of orders that have to go through approval workflow because they're outside of a target price range. "I'm literally getting between 50-90 percent of cases," she says.

This gets back to Brad Thomas's goal of getting around relationship bias, and brings us back to our original question: Why aren't we hearing more about strategies for better pricing?

Pricing Potential
Preslyn likes to say that great strides have been made in the technology for handling pricing management and pricing optimization, and that everybody can benefit from better pricing, but the real key is improving the pricing of business processes to prepare for new technology. Customers therefore will have to make the first move.

For its part Metreo has refined its vertical strategy to focus on manufacturing and distribution, and today released a statement claiming traction with customers like Essex, Eaton, Honeywell, GE Industrial and DHL. "We feel that those alone can get us the number of deals we're looking for next year," Nagy says.

Preslyn says the second half of this year and 2005 could bode well for the price specialists, both in customer growth and M&A that will occur when the larger vendors decide it's time to beef up their solutions.

In the meantime, vendors like Metreo, Vendavo et al are still struggling in the shadow of their customers. It's a Catch-22. Where companies find success they are loath to talk about them, and where projects fail, much yelling is heard. "You can really turn the vendors over your knee right now, drag them through pilots and once you give so much for free because you want a marquee client, it's not quite fair," she says. "I think it's going to be a good year though."

About Jim Ericson
Jim Ericson, Line56 is senior news editor and editorial director at Line56.