January, 2005  — Putting a price on something often is a mix of equal parts clairvoyance and voodoo. Yet according to a study by The Harvard Business Review, a 1-percent improvement in pricing can drive an 11-percent increase in profits. Despite this, many companies neglect pricing optimization even as they focus on improving supply chain, product, or other customer-facing processes.

"Manufacturers have spent the last few years trying to cost-cut their way to profitability. You can't cost-cut your way to grandeur," says Pamela Kline-Smith, a VP with Metreo, a software vendor that helps manufacturers and distributors address pricing issues.

According to Laura Preslan, an analyst with Boston-based AMR Research, there are three elements to pricing: optimization, execution, and enforcement. Metreo has optimization solutions and is tackling enforcement—avoiding the execution part that ERP handles adequately.

"Price enforcement can have a real impact," she says. "Many sales processes are sell-and-repent oriented: you want to sell something, do so at a poor margin, and hope to make it up on volume."

One big problem, says Kline-Smith, is where to start. How do you figure out what the best price is? What is the customer willing to pay? What are the competitors doing? You want a good first price, but you also want the ability to do "what-ifs?" and negotiate.

Solutions like Metreo's analyze historical prices to determine what the optimal price is. By tracking and analyzing the true profitability of each transaction, companies can set guidelines throughout the sales process.

Preslan says Metreo has taken the right approach to an immature market. Having sustained 300-percent growth over the past three years, it's carved out an early market lead and stayed away from functionality already offered by ERP vendors.