May 6, 2004 | Byline Author: George Brandon | Researcher/Reporter: Michael J. Smith — More and more businesses are eyeing new software that helps them get the best possible price in a fiercely competitive market. Dramatic paybacks reported by corporations that have invested in the so-called price management software are creating interest that will fuel a big surge in use over the next two years.

Vendor sessions on the software drew standing-room-only crowds at the Professional Pricing Society's annual spring conference in Las Vegas last month. And about 25% of corporate executives plan to purchase the technology within a year, according to a Yankee Group survey. "There's been an uptick in investments in this area across a number of industries," says Kosin Huang, a senior analyst with the Yankee Group. "The market leader adopts the solution, and competitors hear about it, and the snowball effect follows."

Part of the buzz is due to top executives taking a harder look at pricing policies after cutting costs to the bone during the economic downturn. Across-the-board price hikes still aren't an option, of course, but the software can help a company find specific opportunities to raise prices or at least warn when a discount is unnecessary. It can also help limit promises made by sales staffs, such as offers of special shipping.

Early users of the pricing software, which is sold by Manugistics, Vendavo, Metreo, KhiMetrics, Rapt, Zilliant and others, include manufacturers of high-tech and consumer goods and retailers with thousands of products and hundreds of salesmen assigned to customers nationwide. Eaton Corp.'s Cutler-Hammer division, for example, purchased Metreo's price optimization software in 2000 in an effort to shore up profit margins and shorten the time it takes to respond with price terms on the 250,000 customer purchase inquiries its sales staff handles annually.

To evaluate any proposed deal, the Metreo software analyzes the sales volume and net margins earned on past transactions with the customer, the inventory and manufacturing capacity available to fill the order. It also addresses seasonal promotions that may apply, competitors' prices and the impact the sale would have on Cutler-Hammer's overall margin or revenue targets. A numerical score is assigned to each deal, and those agreements scoring high enough get instant approval. The ones with marginal scores are passed on to senior executives for detailed reviews and possible counteroffers, such as less-expensive shipping methods.

The software gives companies another critical edge over competing manufacturers. It automates enforcement of pricing policies to curb maverick selling hurried deals struck in hypercompetitive e-commerce sales channels. Offering concessionary terms, such as free shipping, can shift transactions with razor-thin margins into unprofitable territory.

Right now, price management software is affordable only for big companies. Trials in a single business unit or division are running around $50,000 or more, and full-scale implementation costs start at around $1 million.

But within a year or so, vendors of commonly used business planning software, including SAP, Oracle, PeopleSoft and Siebel Systems, will begin including more-sophisticated price management features such as low-cost add-ons to their offerings. And within three or four years, affordable off-the-shelf versions developed for particular industries will be offered to midsize companies with regional sales channels, says Laura Preslan, research director for AMR Research.

SAP already offers a pricing analysis add-on from Vendavo, and KhiMetrics is partnering with IBM in offering discount management software to midsize retailers.