March 29, 2004   |   Daphne Carmeli, Cofounder, President and CEO, Metreo Inc. —
"How Can a Pricing Strategy Turn Customer Data into Profits?"

Companies that want to survive and thrive in a difficult economy know they cannot shrink their way to grandeur. They need profit levers.

A recent McKinsey study, "The Power of Pricing," analyzed all potential profit levers for a company, including price, variable cost reductions, fixed cost reductions, asset utilization, and inventory management. A 1 percent pricing improvement produced the highest operating profit increase, at 8 percent, an impact nearly 50 percent greater than that of a 1 percent fall in variable costs, such as materials and direct labor, and more than three times greater than the impact of a 1 percent increase in volume, according to the report.

Analyzing, planning, negotiating, and managing the execution of pricing best practices requires the following:

• gaining visibility into price performance
• identifying segmentation opportunities according to a customers' willingness to pay
• employing deal-specific negotiation tactics that leverage customer purchase history
• managing of rules and approvals for designated price throughout a sales organization

None of this can be achieved without first carefully analyzing customer win/loss information. Customer data, often collected in CRM applications, provides intelligence for pricing improvement. Herein lies the immediate opportunity to gain more leverage from a CRM investment.

CRM applications collect data about customers: who they are, where they are located, what industry they are in, what they buy, when, and from whom. If a company creates price quotes in a CRM application, the data accumulated can also provide insight into competitive losses. Leveraging this win/loss information with price optimization software can significantly increase the return on a CRM investment.

Emerging software applications like price optimization increase sales revenue by using the CRM data as a resource. Price optimization solutions can help companies to do the following:

• improve analysis of CRM data to better understand the behavior segments of customers who buy their goods and services
• create microsegmented models that allow companies to target specific goods and services at very specific groups of customers based on their past buying behavior
• recommend cross- or upsell opportunities
• enable companies to judge in a split-second whether or not a sales opportunity, such as a spot bid or contract offer, is good for the company and immediately recommend profitable counteroffers when the deal is unacceptable
• reduce or avoid costs by increasing productivity and eliminating time-consuming evaluation and response tasks

Pricing technology enables manufacturers and suppliers to evaluate customer requests through sophisticated, predictive analytics that provide recommendations for profitable pricing negotiations, often through easy-to-use, Web-based interfaces designed for nontechnical users in sales and marketing.

Applying pricing technologies and best practices introduces flexibility to an otherwise static, rules-based pricing approach. Because rules-based pricing systems are inherently black-and-white, deals often fall apart if a customer doesn't agree to the prices set by the manufacturer or supplier. With visibility into profit leakage points and automatic counteroffer recommendations, however, deals can still be reached by altering or negotiating variables like payment terms, shipping terms, or quantities involved, all of which directly impact profit margins by lowering operating or administrative costs to the manufacturer or supplier. The result? The buyer agrees to a price that fits his model, while the seller can still achieve her profit objective even at a lower price point by negotiating lower-cost terms with the buyer. The bottom line is that both sides close a deal that is mutually beneficial.

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