By Paul Thompson, Vice President Client Service, EMEA for Periscope, a McKinsey Solution
It doesn’t matter what you sell or who you sell to – it’s hard to overstate the importance of getting pricing right. On average, a 1 percent price increase translates into an 8.7 percent increase in operating profits, assuming no loss of volume of course.
Big data has become the key to achieving successful pricing and margin optimisation, but alone it is meaningless. In fact, some of the most exciting examples of using big data involve solutions that apply advanced analytic techniques that go beyond pricing decisions — they are comprehensive performance management platforms that improve a company’s overall commercial performance.
Many of these advanced pricing optimisation and management systems work across industries because they have common issues and needs when it comes to pricing challenges. But how do companies choose the right solution from the multitude of offerings out there? Here are our top tips on the key areas IT and commercial managers need to consider before making a selection.
1. Analytics and performance management
Good analytics can help companies visualise the scope and breadth of their pricing issues and provide insight and guidance around price areas that need continuous management. Transparent recommendation engines can further guide decision makers without the dreaded loss of buy-in that happens the first time a ‘black box’ makes a non-intuitive recommendation.
Executives should look for a complete solution that can analyze margins and profitability for every geography, customer, and transaction across the entire commercial process — from initial price setting through to product delivery. Advanced analytics should integrate data from multiple internal and external sources and be able to identify opportunities in pricing as well as any leakages — making recommendations and enabling people to make the right decisions.
Decision-support tools should also be available to provide facts to drive day-to-day decision making in pricing, revenue, growth opportunities, and contracts management. Data should be clear, simple, and in an actionable format including pre-configured reports and tools to visualise data e.g., price waterfall charts, scatter plots etc. and customised, user-friendly dashboards to ensure employees understand the results and can take the right actions with confidence. But it should also allow users to add new views and analytics, share comments on a secure platform, and ensure insights track through to action — a platform that helps you work the way you want to work drives adoption of advanced insights.
2. Competitive analysis
Setting the right price requires market intelligence and analyses. Sophisticated web extraction and analysis systems enable executives to access and monitor information on products and prices across multiple websites. This market intelligence — with digital mash-ups of high-quality data mapped and matched to appropriate comparables — facilitates the analysis of external factors that affect price-setting decisions and helps companies assess their competitive positioning.
The solution chosen should enable companies to monitor an unlimited number of products and price points and provide advanced product mapping to ensure in-depth comparability of their own and competitor products.
Important considerations to bear in mind with web extraction and analysis suites include looking carefully at what is included. Does the solution provide specialist price operations, a strategy module, modeling and “what-if” analysis, and qualitative customer rankings and review information? In addition, ad-hoc reporting and an easy-to-use interface are essential to support day-to-day decision making.
3. Price segmentation, setting, and management
Price and margin optimisation requires granular segmentation and the ability to model micro-segments of products, channels, and geographies as it is too expensive and time-consuming to analyse these dimensions manually. Automated systems can identify statistically relevant narrow segments to allow companies to set prices for clusters of products and segments based on data. The internal economics of the product sets (margin requirements) and customer base price sensitivity and elasticity must form part of any pricing analysis. Take care to ensure these features are rich and flexible, taking into account competitive factors, your overall pricing architecture and the impact of pricing on any retail or distributor network.
Automation makes it much easier to replicate and tweak analyses so it’s not necessary to start from scratch every time. Importantly, the best systems give strategic control top-down across these segments so that a change in objective by product, channel, or geography can cascade down in a smart way without rewriting thousands of rules. Strong pricing suites combine a complete pricing database with advanced price-setting methodologies and price recommendations, perform price validation, and forecast the impact of new prices. Systems that integrate with web extraction and analysis suites ensure best possible market intelligence.
Controls must also exist to allow management to embed pricing rules and guardrails to avoid expensive. These must be proactive in enforcing policy, alerting staff and managers as those rails are overridden.
Today’s advanced systems can handle approval workflows for price discounts, generate customisable scorecards, provide price recommendations at the SKU level, and automate workflow management. Good solutions streamline and improve overall process management by automating the price setting process and integrating it into a workflow with role-based views and rights (e.g., approvals, overrides). User should expect a user-friendly experience with roll-ups and drill-downs that allow executives to better understand and evaluate recommendations, including those on price/cost trends, brand ladders, and pack price curves.
4. Deal management
Optimising individual deal prices during the negotiation process requires a deal configuration, management, and quote execution capability to capture customer and deal history and structure contracts based on historical insights as well as benchmarking against other sales teams’ performance to incentivise more profitable deals.
Companies need to evaluate whether the solution can create custom quotations, capture and track volume-based discounts, minimums, and penalties, and track multiple contracts throughout the organisation. Today, many software tools include integrated contract life-cycle management as standard functionality and the impact on mitigation of potential risk and management of control and margin issues is significant.
Ease-of-use and relevance are crucial for any tool embedded in everyday decision processes. A truly useful price and margin optimisation solution starts with the ability to aggregate and sift through the mountains of data, formatting it into usable information. A user-friendly solution will provide executives with the precise information they need to make good decisions, without requiring them to know and work with the detailed technology underlying the functionality of the tool.
Finally, although it’s critically important to choose the right pricing optimisation solution for your business needs and take a structured approach to its implementation, you should never hand over decision making power to the system across all your products. The human component is the final critical factor in competitive and effective pricing that wins the confidence of new customers.