A Secret Weapon to Drive Top Line Revenue
If there’s one goal CIOs want to achieve this year, it’s to help drive revenue. Some shrewd CIOs have found a little-known route to get there: Price optimization software.
Not familiar with it? I'm not surprised. Because pricing is such a closely-held business strategy, many companies don’t want to confirm even using the software, for competitive reasons. But in fields like business-to-business manufacturing, chemicals, distribution, and industrial services, this software – provided by vendors including Zilliant, PROS, Vendavo and Rapt -- is helping companies drive big improvements to top line revenue. Margin gains of 10% and profit enhancements of 15% or more are typical, according to Gartner data.
“Nobody wants to talk about this software for two reasons,” says Gartner Research VP Robert Desisto. “First, it’s a competitive advantage. Second, it’s not the kind of thing you want your distributors or resellers to know about. The benefits have been so substantial that companies want to hold onto it as tight as possible.”
The software, typically based on sophisticated statistical modeling techniques, slices and dices historical data (such as that from your sales process) to maximize prices for margin, using factors like the uniqueness of an item, or the fact that customers in a particular geography will pay more. Travel industry companies have priced this way for years, of course. But it’s a big change at manufacturing firms like Acuity Brands Lighting, which sells a huge range of products, from industrial lights for commercial ports to streetlamps and home lighting fixtures.
Like many of its B2B manufacturing peers, Acuity had long used a “cost-plus” model for pricing: Figure out what it costs to make the product, then mark it up by a fixed percentage, says Pat Quinn, Acuity’s VP of information systems and technology. This traditional approach “cheats” the company from realizing the best margins on many products, analysts say.
“You’re always striving to keep fixtures from being a commodity like eggs,” Quinn says. “Because it’s a very competitive market, you’re always asking ‘How are we going to eke out that extra bit of margin?”
At Acuity, the executive team became concerned with price erosion in the marketplace about three years ago, as their prices and margins continued to decline. They hired A.T. Kearney to do some margin analysis, looking at prices of products across different markets, and gained some valuable insight, Quinn says. But he faced a big problem. “From an IT perspective,
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