How to Determine the Value of Pricing Software to Your Company
Pricing is an important aspect for every business that sells goods and services. While seemingly very simple, pricing is a process that should be taken seriously and can have a significant impact on businesses, large and small regardless of industry or location. Anyone who is anyone in the world of pricing or works in a pricing department has probably heard of The Power of 1%. If you have not, it refers to a famous 2003 McKinsey study that a 1% overall higher price can result in an operating profit increase of as much as 8%. With inflation and price fluctuations now rampant, pricing software can unearth where those ‘1%-ers’ can be applied, enabling businesses worldwide to carve out as much bottom line for their organizations wherever and whenever they can.
At Strategic Pricing Management Group (SPMG) and Pricefx, we have been working together for a while now, bringing our combined 30+ years of experience to bear. Together, we provide a powerful range of B2B and B2C expertise to deliver a complete pricing solution for a range of businesses and drive higher margins and better returns. With each pricing software project, we ensure you are engaged with professionals who have deep and rich pricing expertise.
Leveraging that experience, SPMG’s research shows that implementing specialized pricing can result in an incremental margin of 1000 basis points or between 1 to 5% return on sales (ROS). If a company’s turnover is $500 million, it is likely that the company will gain an additional $5 to $25 million in operating profit by optimizing its pricing strategy and implementing the right pricing software.
This article discusses the business case for implementing pricing software beyond sales and operating profit returns, by explaining 6 of the challenges it helps solve and as a bonus, gives you a framework to assess the fit of pricing software to your organization.
The 6 Value Points Pricing Software Brings to Your Business
Now that we have set the foundation for the potential total increase in value pricing software can bring to your organization let’s dive into the 6 value points that pricing software will enable to get you there;
- Enables Data-Driven Decision Making
- Enables Implementation of Value-Based Pricing
- Increases Pricing Agility
- Makes Pricing Process and Administration Error-Free & Efficient
- Enriches Market Intelligence to Understand & Quantify Willingness-to-Pay
- Creates Time for the Team to Work on Adding Value
1. Enables Data-Driven Decision Making
Today, the amount of data available to use in pricing decision making has increased significantly. Moreover, data collection has become a lot cheaper than before. To collect and analyze data, many companies use spreadsheets. This is often difficult, time-consuming, and prone to error.
For example, a global B2B client who has a €7 billion turnover was able to get detailed and accurate data. This data included transaction data, market related data including competition, and manufacturing/ production related data including detailed costing. I discovered that they were struggling to convert this data into information that drives action as they were still using spreadsheets.
In fact, it took them over a month to collect all the information just to answer Requests-for-Proposals (RFPs). Furthermore, the process was full of limitations and bottlenecks due to the number of manual inputs and work-ins, and everything being performed manually using spreadsheets. What’s more, thanks to the manual nature of the process, the work was highly error prone. Switching to pricing software allowed the automation of this process, reducing the time to respond to RFPs to days and allowing for error-free output. Additionally, market related information was now accessed easily (a difficult task to integrate when they were using spreadsheets). The result was the ability to quickly respond to pricing requests and an improvement in the outcomes (better win rates/ higher margins).
Having the right tools/ software and processes to automate analysis and data visualization is a crucial step towards better pricing results.
2. Enables Implementation of Value-Based Pricing
Within the SPMG set-up, organizations are divided into five levels based on their pricing maturity. Organizations in the lower levels are typically those who use a cost-plus approach for their pricing decisions and have limited use of specialist tools. On the other hand, organizations in the higher levels are typically those who have adopted a value-based pricing strategy and enable it with specialist tools.
Pricing software enables an organization to move towards value-based pricing, i.e., implementation of pricing techniques and strategies across different customer segments, product types, and business units and geographies. Organizations can add up to 1000 basis points to their margin or between 1% to 5% return on sales upon successful implementation.
Learn More About Value-Based Pricing Here
The image below shows the journey through the levels of maturity and the potential margin expansion available.
Increases Pricing Agility
3. Increases Pricing Agility
Today, markets are very dynamic and often prices need to change more than once per year. One case that comes to mind is a B2B manufacturing company that required 90 days to execute a price change. If they had pricing software implemented, they would have required a few days rather than months to identify and execute the price changes. Furthermore, the software would have enabled use of a good depth of analysis and enabled easy execution of these price changes.
Pricing processes should be able to respond to changes. Every day delayed in passing on the price increase is money lost. Pricing software should enable you to quickly detect market changes, analyzing the impact of the change, and produce a set of responses and simulations and finally execute these changes. With the right pricing software and processes in place, this can be done almost instantaneously with little to no lag time.
4. Makes Pricing Process and Administration Error-Free & Efficient
This includes a robust Configure-Price-Quote (CPQ) tool, pricing governance, pricing audits to name a few. Pricing software should minimize (manual) errors, automate workflows, and should act as the “one source of truth” when it comes to pricing discussions.
5. Enriches Market Intelligence to Understand & Quantify Willingness-to-Pay
A key element to achieve value-based pricing and improve margins is understanding and quantifying the willingness-to-pay of the different customer segments. This can be achieved through external market and competitive intelligence in addition to quantitative methods such as conjoint analysis.
There are some exceptionally good software tools available today that have made it easier and cheaper to conduct conjoint analysis with integration of the results being built into the pricing decision making process. Advanced analytics tools including those providing Artificial Intelligence and Machine Learning also help in segmentation, churn rates, etc.
Check out this recent article Is Pricing Analytics Software Right for Me? to learn more.
6. Creates Time for the Team to Work on Adding Value
I remember leading pricing teams where most of the time was spent just collecting and collating information from various sources into something sensible, and only 20% of the time was used on analysis and driving decisions to improve revenue and margin. A well implemented software tool will flip this ratio and allow the pricing team to spend most of their time on value-added activities rather than collating information.
A good pricing software tool should provide a framework to get all the required information at the decision screen on the go, rounding out the 6 key elements of value that are delivered with strong pricing software to deliver the 1000-basis point margin expansion.
More Additional Points to Consider When Evaluating Pricing Software can include;
- How well the pricing software integrates with your existing software systems, especially the ERP (Enterprise Resource Planning) and CRM (Customer Relationship Management) systems.
- Does the software have a strong history of providing innovation? For example, a strong Artificial Intelligence component if implemented sensibly can enhance key decisions like customer segmentation and the pricing/ discounting policies, etc.
- Does the pricing software make it easy for the Sales team to calculate, communicate and sell the value to their customers?
- Moving from spreadsheets to specialized pricing software is a huge change management challenge. Do you have the right team in place to enable this change?
- What is the experience of the software provider in your sector? If a particular software provider has a strong presence in a specific sector, chances are that their solution may provide a good fit.
- Does your organization prefer a cloud-based pricing system or an on-premises pricing system?
- ROI: How much is the total cost of ownership of the software solution including the implementation and maintenance. What is your likely return?
A Framework to Assess the Fit of Pricing Software to Your Organization
The framework below gives you the ability to compare different pricing software solutions based on the value they are likely to deliver to your organization.
There are multiple attributes you compare the different solutions available in the marketplace.
- Pricing functionality – This is possibly the most important attribute. Does the software provide functionalities that the organization needs? These can be evaluated based on the software’s ability to do the task, the effort required to build/ configure as well as the ease and speed of the process.
- Software integration – Does the software provide seamless integration with the company’s existing ERP/ CRP and other software?
- Sector expertise – Does the software provider have strong experience and reference clients in your sector? (Nice to have, but not essential).
- Degree of Self-Service vs need for expert help to perform changes – What are the range of changes that can be performed in-house vs going to external configuration specialists? There is a strong preference for self-service for simple to medium complexity changes.
- Innovation and future proof solution – Can the software accommodate my company’s future changes?
- Time to payback – How quickly can I start using the software? What is the payback period?
- Flexibility – Does the application fit specifically to my business (B2B/ B2C), geographic footprint (local/regional/ global), size of business (is it a fit?). Good software should be flexible to accommodate a range of factors.
- Change management and cultural fit – Does the software provider or its partners have the right experience
- Ecosystem provided by the Software Provider – Does the software provider have a strong ecosystem of internal support as well as partners who can provide support with identifying an optimal pricing strategy, processes and help with implementation of the software?
The estimated value index gives you an idea of which software provider’s solution is the best fit for your needs.
This is then compared with the cost of total ownership of each of the solutions.
Typical Costs to consider include but are not restricted to the following:
- Subscription cost or annualized cost of IT infrastructure if it is an on-premises solution
- Implementation/ Configuration cost
- Maintenance cost/ further development (change request) cost
- Training cost
- Personnel cost
Great – I Now Know the Estimated Value Pricing Software Can Bring to My Business – But Where Can I Get Help to Implement it?
If you are unsure where to start, use a pricing software partner.
Despite an existing perception that a pricing software partner just turns up to make last minute tweaks to your system, takes their paycheck and moves on, in fact the opposite is true. As it is their ‘bread-and-butter’, a pricing software partner usually has deeper and specific pricing industry expertise than most pricing software vendors.
Every pricing software partner can supply you with different pricing solution perspectives and many pricing software vendors use multiple strategic and implementation partners and Pricefx is no different.
If your business is searching for pricing software but lacks some of the required expertise in strategy development and integration, then take the opportunity here to learn more about the Advantage Pricefx Partner Network, SPMG, and other pricing software partners available for your business to work with.
On the flip side, if you already have the required knowledge in place, you can also choose to stay one step ahead and check out the article below that takes you through choosing the right pricing software for your company’s unique needs;
About the Author
Venkat Vaidyanathan is the Managing Partner of the UK and EMEA region of SPMG Global, a consulting company specializing in all aspects of pricing from strategy, process and the implementation of tools, software, and research. If you would like to discuss your organization’s pricing, reach out to him at firstname.lastname@example.org