Enabling Sustainability Through Pricing Agility
June 22nd, 2021 | 31 min. read
Enabling Sustainability Through Pricing Agility
As market complexity grows, so does the need to maintain sustainable and profitable growth. Only by being price agile and using the right technologies can companies like yours enable the delivery of market-aligned prices when conditions shift. As a result, for many, this can mean the difference between winning and losing in the fight for survival and market domination.
Join Tom Roberts, senior vice president of the global partner organization at SAP, and me for valuable insider information on market complexity, technology evolution, and the growing emphasis on the importance of price optimization. You can listen to the podcast from the embedded player below and read along from the transcript.
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Growing Focus Around Price Optimization
Gabe Smith 0:00
Hello, everyone, and welcome to Pricing Matters. Today we are pleased to have on Tom Roberts, the global SVP of software partner solutions at SAP. Welcome, Tom, and thanks for joining us.
Tom Roberts 0:10
Hello, Gabe, good to see you again.
Gabe Smith 0:12
For people that don’t know who you are, or know what you do at SAP and specifically about maybe the partner programs and software partner solutions, maybe can you introduce yourself and a little bit about those?
Tom Roberts 0:22
I run software partner solutions for SAP globally. And what that means is that SAP, of course, goes out of its way to try to cultivate a really rich and powerful ecosystem of software partners designed to help our customers meet their needs. SAP as big as we are, we can’t code everything, and we can’t deliver every solution. So, we rely heavily on partners like yourselves to fill the gaps and make sure that our customers can run their business end to end. So, we’ve been at this for a number of years. But the new news still is that at last year Sapphire, we announced something called endorsed apps, you’re one of our premier partners inside endorsed apps. And what is it? It’s really the ability for our customers to come to the SAP Store, or sometimes we call it the digital marketplace, and be able to look at a curated set of solutions that are going to help them run their business better.
Gabe Smith 1:19
Yeah, I’m really excited about the continued evolution of the partner programs, and particularly around the endorsed apps, which makes it easier for cloud-based vendors like ourselves to integrate in with the SAP environment, but then also having the customers with the trust and certifications and the confidence that comes with those certifications. So, what I like about SAP is that you kind of get the fact that pricing optimization and management is a thing is its own space. And it’s very deep and rich in terms of abilities that are required. And I’d say really, SAP is the only mega vendor that gets it. We call ourself Pricefx, but what we actually sell is a profitability management platform, right an optimization platform and, and it really helps our clients manage that whole price waterfall, and I know SAP has various things that touch those other processes. But it really works together quite nicely when we are able to bring some of that power to an SAP client, bring some of the data in from SAP and then be pushing pricing conditions and quotes and things out into SAP so it can transact very quickly. Let’s talk about your personal background a little bit here. So, you got an MBA from Wharton, if I’m not mistaken, is that correct?
Tom Roberts 2:25
You know, actually, I never completed Wharton. It’s an interesting story. And I’m proud to tell it, you know, I got very interested in certain classes that I wanted to take at Wharton, and I attended there for a number of years, but I never completed and here’s why. My wife and I are raising two kids at the time. And I made a decision that says, you know, there’s a bunch more accounting classes here, I have no interest in to complete this. And I said, I’ve gotten the value out of the education that I wanted in it. And that’s what sort of dawned on me is that, you know, you pay for things that you really value. And to me necessarily having a stamp that said MBA isn’t really why when. I went to learn certain things, around strategic alliances, and around some other things, really got some great benefits from it. But I never completed my MBA, but I do value the time that I spent there. And it also, you know, made me very aware of that price to value relationship – was that price right for me to go ahead and finish that versus that. And maybe that’s a great segue into our topic is sort of price to value in the decision making that people make
Gabe Smith 3:27
One thing that I wanted to ask you is, you know, we’ve seen that there’s been an increase in focus and kind of understanding around pricing and the impact of pricing in various MBA programs. For example, University of Rochester, Simon Business School has a pricing focused MBA program, and we’ve done some work jointly with them. This seems to be coming up more at the C-level. Are you seeing that as well from where you sit that there’s kind of an increasing awareness and focus on pricing optimization as a profit lever?
Tom Roberts 3:54
As markets have gotten really complex and as technologies evolved, you could do things that were only theoretical in the past, like reacting to real time changes in commodities, and having that flow all the way through to pricing as an output. But now the systems are coming to the point where you can actually execute on things like that. And you could never in the past, so I see more and more emphasis on pricing. As you said, it’s the direct lever to profitability. And if you don’t have your handle around what happens within this business process, it’s the difference between winning and losing. It’s plain and simple. So, it’s not surprising that inside the major business schools pricing has emerged as one of the top things that they’re focusing on.
Gabe Smith 4:36
There’s been so much volatility with supply chain with cost with competition, industry consolidation, increased transparency. At when you look at that kind of value chain from the commodity suppliers to the component suppliers to the kind of finished goods suppliers, and then distributors and retailers, what’s happening is that, you know, as this gets deployed, this kind of technology gets deployed. And people digitally transform their processes, it kind of becomes like a musical chairs or like a hot potato, right where it’s like, whoever is the slowest ends up experiencing the margin compression, depending on where you are in that value chain, you can actually use some of the intelligence that’s signaling certain things that are going to happen even before they do. And you can actually use that to your advantage. So, if you’re a manufacturer, and you have, you know, a lot of steel in your products, before your supplier actually increases the prices, you can actually see what’s happening with the steel index, and you can predict that that’s going to happen, and you can actually adjust your pricing and create float off of that event, rather than waiting for them to do it and then struggling to respond to it. Right.
Tom Roberts 5:38
There’s always this optimism that, “oh, it will go back to normal and will absorb this,” right. So, because people are not price agile. And then what they begin to find out is that look, what if underlying the change in the pricing is actually macro trends, like the devaluation of a currency, if you don’t react to that, now you’re getting a double whammy, right? You’re still charging at an old rate, you know, your price is still fixed to that particular currency, yet, you’re experiencing the increase in the margin compression associated with the commodities underlying it. Now, you’re not only just struggling from a pricing standpoint, you’re getting hit on both fronts, because you haven’t put the pricing agility into place. And I honestly say, I think because technology is where it’s at, the ability to react to those things does exist now. And those who don’t will fail. That’s why they say look on the Fortune 50, they say in the next 10 years, less than five of them will still be in the Fortune 50. And this is why right, a lack of agility around this reacting to how the market changes gives them no ability. Well, they say, hey, it’s always been priced that way. And they just ignore it, suddenly, it’s to their peril.
Gabe Smith 6:45
With trends like Amazon coming in and disrupting all these markets. And the direct-to-consumer thing that’s happening is disrupting a lot of those standard distribution of markets and it just changes the dynamics. Understanding what the customers value, being able to structure your whatever offer is, whether it’s services, or product or combination thereof, and price that in a way that reflects that value, and really stay close to it and understand how you can differentiate that value. And then and then capture that value with price. That’s what it comes down to. And that’s easy to say. And it’s again, it’s easy to do in theory, but when you’re at a complex, multibillion dollar company, like a lot of SAP clients and our clients are, it’s very difficult to execute.
Connecting Your Business Systems for Greater Transparency
Tom Roberts 7:24
Understanding that connection from order entry all the way through manufacturing, and then being able to manage in a single system, the understanding of what the underlying costs are for manufacturing, plus the costs associated with the materials headed into it, and aligning that against the demand signals coming from the market. If you don’t have your handle around those three, then you’re going to struggle.
Gabe Smith 7:48
There’s tons of data out there now, right, and people that really kind of, in some cases been struggling to get their hands around that data and get it structured in a way that you can actually use it in intelligent ways. Some of that works like been done now. And obviously what’s happening in the pricing space, right, where you’re able to use AI and use machine learning to figure out how to segment and optimize pricing, but actually embed that intelligence into the everyday business process, right? That’s really how you turn data into intelligence and how you enable an intelligent enterprise. And I just be kinda curious to get your perspective on that.
Tom Roberts 8:21
I always go back to this and people say, “why did SAP move their flagship S/4 on to HANA and make it S/4 HANA?” Enterprises are so dynamic now, the real challenge is managing that data inside the context of what’s happening in the business process. And there’s only one way you can do that. And that’s with something like HANA, that can handle both the OLTP, the transactional side of it, as well as the analytical side of it, and not have to move the data, I look at how much money companies spend pushing data here and pushing data there. Whereas if they could just leverage it, without having to move it, they’d be much better off. And this is, of course, the strength of what was designed. And I think it was that forward thinking that said, this isn’t going to hold this model of shuttling the data in and out and then trying to reconcile isn’t going to work. Now let’s start to apply that to a concept as real time focused as being able to quote or deliver pricing associated with a business process. So, your add order entry, and you’re trying to figure out how much to charge for x, will you need information across the entire enterprise in real time to be able to come back and tell you that and then optimize it for that specific customer. You’re not going to do that in a scenario where you’re shuttling data all over the place.
Gabe Smith 9:39
We have some clients that are actually calling us via API in real time, because it’s very dynamic, whether it’s based on commodities based on competition based on whatever it is. And so, they’re just providing us, okay, here’s the customer, here’s what they’re asking for, here’s the quantity, here’s the timelines, and then we say, okay, here’s the price. Maybe it’s an envelope of price that says, you know, here’s the target and here’s the stretching or something like this, that’s increasing, you know, in terms of its applicability across different industries, right is really trying to get that dynamic. What dynamic pricing means really varies a lot by industry, like we think about, you know, competitive dynamic pricing and e commerce, right. That’s the kind of standard but what like what we’re talking about with commodity indices, or other indicators, pricing, anything from ski tickets in Switzerland, to you know, steel drums, to commodity chemicals, to electronics, finished electronics goods to the components. And so, each of those has its own needs around how dynamic it needs to be. But the nice thing about price effects as a platform, and I think SAP and S/4 HANA as well, is it can be as dynamic as you need it to be, what I’m seeing is over the last five years is a huge increase in the needs around that because of all of these disruptions with supply chain and, and you got the demand side happening as well, right? Really, it started off kind of with the trade and tariff wars that seemed like even before that you had a fair amount of volatility on the commodity side, right, and then you get the tariff trade thing happening. And then you get COVID happening. And it’s just like one thing after another. And now we’ve got inflation happening where you know, people are struggling to keep up with the PPI and CPI.
Tom Roberts 11:10
Gabe, what’s the one consistent in there? Thinking that it’s going to settle down and to go back to the way it was. And the reality is, it isn’t. And if you haven’t moved to this agile mindset around pricing, you really put your company behind the eight ball, if you keep denying it, that there isn’t going to the next thing that causes pricing to have to be more responsive, and more personalized, you’re kidding yourself.
Gabe Smith 11:34
Some of these disruptions, and some of the issues with supply chain actually could have been made better if they had more dynamic pricing capabilities at certain points in the value chain, right? We talked a little bit about that before. A manufacturer that’s really good at you know, pricing optimization, they can kind of flex their pricing to meet the supply demand, whatever that is. But, you know, if you get a component supplier that’s not good at it, and someone sees, oh wait, there’s a supply chain disruption happening, and they just go buy up all of those components. And now none of the other manufacturers can actually build anything, right? This is happening with everything from bikes to chicken wings to lumber, right, lumber is, like they’re saying is increased the price of a home like $39,000 because of lumber shortages, right? SAP has products around procurement or Ariba and these kinds of things. And then it has products around pricing. And there’s more and more intelligence and AI and things being deployed there. At some point, it’s just going to be machines buying from other machines, I was just talking to a prospect that I won’t name but they are running SAP and they were really interested in this kind of marketplace type of pricing and what we could potentially do to like be interfacing directly with a procurement system, for example, to enable more agility and more intelligence in that process. Do you have any thoughts on that?
Tom Roberts 12:47
You know, you mentioned dynamic pricing. And everybody uses the example I think you ski tickets or airline, you know, airline tickets, right is the one like, hey, the guy in the seat next, you paid $50 more or $50 less than you did. And people have adapted to that. Like there’s always a feeling like, well, that’s unfair. But also, immediately behind that is the transparency of well, why is that? Okay, was the time it was bought, bought way in advance or had flexibility and could buy last minute, and people begin to understand those whys, and then as that transparency comes up now this procurement to pricing example is going to be the same way. Do I think it’s inevitable? I 100% think it’s inevitable. Here’s why: all things have this sort of elastic availability, and they also have a time dimension to them when you need them. I think as we look at things like the perfect market, we always refer to as the stock market where algorithms battle back and forth to try to seek the best price, you’re going to see that in the enterprise as well. We’re going to see that tomorrow. No, we’re not. But pricing optimization is becoming more and more sophisticated. And procurement is becoming more and more sophisticated. And as that battle goes on those algorithms will be the only way to seek the next bit of advantage, either by saying I’m going to buy a little bit more, so I achieve a discount. And I’m going to buy it at a certain time when I know some of this is and I’m going to arbitrage that against where I’m going to inventory it, where I’m going to store it. And those decisions are best left to the machines, because they can do them very, very quickly. As long as people understand what those different aspects are just like that airline seat early, you get lower. Those things exist on both sides. We know they do we know that procurement always strives to get pricing that if they pay or they buy at certain times the price is going to fluctuate. This is going to hold all the way through and the further you go down into the value chain down into the commodities, the more you can see it. It gets much more like what happens on Wall Street. If companies aren’t planning for that inevitability, certainly in the largest global companies they are but the more you can start to think that way, the more that’s going to play out to your favor and to your benefit. As you see, as this volatility drives interest in vertical integration, more control, more span of control within your supply chain is always favorable when volatility is higher. I use a simple example, right, I’m buying a shed from an Amish company. Well, they also happen to have vertical control around the supply of the wood. So, they’re not as greatly affected as either by the shortages or the price spike, because they’re more vertically integrated. Now, that’s a small example. But you can see how much of a difference that can make as things become unstable, and become more volatile, they’re able to maintain their pricing in a much more consistent manner and still be able to deliver their profitability because they have more vertical control.
Gabe Smith 15:42
You get a lot of exposure to the partner ecosystem, particularly the software side of things right. And there’s various trends like moving from perpetual to subscription, and that impact on how companies are run, how we sell, how we go to market. I’m sure there’s a lot of SAP clients as well, that are maybe from more traditional manufacturing backgrounds or other industries that where they’re looking on taking, moving to subscriptions. It really gives companies an opportunity to look at what are those value metrics, and how should I be pricing this, but if you really look at and you really stay close to customers and understand what they value, even a customer that’s buying dirt, which is arguably the most commoditized thing in the world, right? Well, what they value is, if you don’t get them that dirt, if they have to wait in line for an hour, their whole operation is waiting for that dirt, because they have to pour foundation and compact it right, they’ll pay a lot more to not have to do that.
Tom Roberts 16:33
You know, people always worry that dynamic pricing could be discriminatory in some way. But it’s actually time is always that driver that some people will pay more for sooner, if your market can support that, then that’s a that’s a trend. Now, this aspect of on prem versus SAS paying subscription. Basically, instead of owning the intellectual property, and then paying maintenance on it. I think for years, the software business did two things, it would get paid up front for a license, but then it would also charge the maintenance on the backside of it. So is it a huge leap to say, hey, there’s really just one charge. And what you’re really paying for is the maintenance, not so much. I mean, the underlying compute underneath it helps centralize that and take a lot of cost out of the enterprise. Because let’s be honest, there was a lot of redundant hardware across a lot of enterprise data centers, especially when you consider that they would have to build their own data center for their own peak usage. And then couldn’t really effectively share aside from a handful of very smart companies would share or offload their unused capacity. So, you had lots of zombie servers, taking up lots of electricity, a lot of capital expenditure. So, it’s quite natural that that glut was going to get hit with cloud computing and a consolidation around it. Does have to go all the way to full multi-tenant for everything? Maybe not. You know, that that’s, that can be argued for another day. But the reality is, is that the consolidation of data centers so that loads can be shared, and that those costs can be cut. There is a huge opportunity there and you can see that’s what’s turned into the hyperscaler’s business. Do they always want to charge based on subscription? Yeah, it’s best because what’s at the very root of it, sort of electric bill. So, it was pretty natural that that type of pricing was going to dominate. And I think technology will continue on down that route. And it will get more and more sophisticated the level of services that you can pay for as you need. Does that mean that the technology industry won’t have as high margins? Probably, I think that’s reality. But that’s also the case of where it’s at, in its lifecycle, just like any other businesses, as things mature, profitability does come under pressure.
Gabe Smith 18:50
Yeah, I mean, it’s, it’s kind of crazy speaking of agility when you think about how all that played out, and you mentioned, you know, a couple smart companies, and obviously, Amazon being one of them that, that realize that there was this opportunity. And we look at you know, a company that started off selling books, and now sells, you know, billions and billions of dollars and stuff and doesn’t actually make any money on what they sell. But they make all their money selling their server capacity, right?
Delivering the Right Price, at the Right Time, to the Right Customer
Tom Roberts 19:14
Just like the dirt example you gave. It’s how much will you pay to get it when you want it? And what are some of those other services that are going with it? In this case here, it’s the massive amount of compute power that can be delivered to the enterprises. And it just strictly came out of the hey, we have all this excess capacity at non-peak periods being retailer, obviously, at a scale for Q4, and then the rest of the day, we got all this excess capacity, we should sell it, boom, there you go. You end up with that finding a home and consolidation of enterprise data centers.
Gabe Smith 19:46
You’ve seen a lot of these kinds of transformations happen. What kind of trends are you seeing there? Or what’s your perspective on that?
Tom Roberts 19:52
Yeah, I mean, it’s just personalization. So, on B2C side, what you really see is exactly this is that this flexibility to be able to just consume what you need and pay for just what you consumed. I was always really impressed when I went to European cities and saw how rapidly they had transformed to get e-bikes or e-scooters out in large numbers. And then the ability to price and charge for that and run that infrastructure, how fast it happened. Went from non-existent into the very next year proliferating everywhere. how do you do that? You have to be able to understand that you’re going to just charge for use, and then people have to feel that that meets their needs, that it’s fair. It’s an interesting dynamic to see how quickly a model like that can go from zero to 100. And there’s no market friction there. Just immediate adoption. Okay, I’m going to use that from get to point A to point B, and I’m going to pay X amount – I’m in. The nice thing about an approach like that, where you where you take this personalized approach and matching value specifically to the to the consumer, and then can just charge for that, that’s the level of sophistication that most companies struggle with today to be able to get with. Now if you go to the B2B side, it gets more complicated, right, because you’re a long running relationship, typically, it’s not transactional. And there’s going to be different points in which where the value isn’t going to be equal, it’s going to go up and down over the course of that relationship. So, it’s much more difficult to execute in there, but we’re seeing it more and more, and you use the compute example. And I think that’s a pretty good one.
Gabe Smith 21:22
In some cases, you’re seeing that these market needs are able to be addressed so quickly that everyone jumps in it. But there’s usually only one or two companies that actually get like that kind of network effect and actually end up winning, right.
Tom Roberts 21:32
You put your finger on something that is one of the things that will have to be conquered in the tech space and in the future, which is the technology today has a very much a centralizing dynamic to it. And we can see it you mentioned Amazon, I could go to somebody like Netflix or some of these. And what you see is that you only have one or two winners and a very steep Pareto of just how quickly it drops off from the number one to the number two, and then it just and it just flatlines that’s not necessarily a great dynamic. No, I think technology can also overcome that. But we’ve now witnessed it in a number of places, you know, you’re down to like two major cell phones, maybe three major cell phones, there used to be dozens, right? You can go right down the list, even spaces that you would think wouldn’t fall victim to this, like media, and banking, and airlines, all of them have gone through this massive consolidation. And if you look historically over it, I always remind people, you go back to the Communications Act of 1996. Think how long ago that was, the telephone didn’t change for literally 100 years. It was a landline connected to your wall or a wire right until that was deregulated. And then all of a sudden, you have this explosion in the telecommunication that gave us the cell phone and the smartphone and everything else that came with it. When we get to these points where these things are massively consolidated, it is one of the few times where government does have to exercise some power to say how do we bring choice or how do we bring some things out so that the marketplace does bring variety. And today’s technology is a very centralizing and focusing type of capability, because it just creates such massive barriers to entry. It’s hard for competitors to get in and get started and actually ever get going.
Gabe Smith 21:32
I talk a lot about the future of pricing the future of commerce, I wanted to get your take on that as someone that gets exposure to a lot of different angles and the way technology is being used and the way that SAP is looking at the future, you know, and partners like Pricefx are working to enable our clients to excel in the future.
Tom Roberts 23:33
We’re all acutely aware of what a dominating force and Amazon is in the retail space. And I see retail under tremendous pressure, I read a depressing report over the weekend about how many bricks and mortar retailers will cease to exist after 2021. I mean, the handwriting’s on the wall firm, and these are legendary names that are going to go into bankruptcy very, very difficult to watch. But on the bright side of it, what I’m seeing is I’m seeing companies who understand brand, starting to look at vertical integration using their own brand and their own presence, recognizing that the direct ownership or the direct interface to the customer is important. Being disaggregated at the endpoint, in a commerce scenario is not good, you will miss the signals from those customers that will lead your company down the wrong path, right. So, there are some of these companies are doing and I’m seeing it in places that you wouldn’t expect maybe the hospitality or entertainment industry where they’re recognizing that wait a minute, we can actually do some things where we can vertically integrate not in a consolidate or acquisition approach but from a commerce approach and bring things together so that it makes for a good buying experience for their consumer. But it’s not necessarily companies that they own. Its companies that they partner with. So, I’m seeing a lot more partnering in the commerce space and then an aggregating along those to execute around brands and sports is smart around how they do this, retailers are starting to evolve around how they think and do this, specialty retailers, I should say, because they have a niche, and they’re trying to broaden it. And they’re starting to look at that. And I think that’s going to be a big dynamic. And it’s one of those ways that choice does come into the equation, as much as people value getting something for a low cost. They also really value a unique experience with special products that are different. Human nature, right to say, “oh, that’s different. I haven’t seen that before.” And they are willing to pay for that. So, the curation of really interesting things that go together that create that relationship in that I think that’s the future that you’re seeing in commerce. And of course, pricing plays a role in that, right? That there’s an instance there where it’s not always necessarily the lowest cost, it’s how it fits into that experience. And bicycles are definitely going through that when you see the lines blurring between bikes as recreation, and bikes as serious transportation. There is nothing hotter right now. Go out and try to buy an e-bike. Look, let’s be honest, people don’t want to ride a bike to work because they want to show up all sweaty. Charges, it’s really cost efficient, good for the environment, and you know hotter space. That’s an innovation that’s just sort of just sort of really taken off as a result of the pandemic. And you just see a lot of great innovative companies kicking out there.
Gabe Smith 26:25
Yeah, I’d like to wrap up with just kind of a asking my guests what they might be reading, besides depressing retail reports over the weekend.
Tom Roberts 26:34
Caught me, you caught me, right? There’s no secret that I am always really interested in history. And in particular, I follow a lot of stuff around lost civilizations. Gone to Peru and gone to different places to really see how did they do that? What was life like then. And so, I read maybe some more arcane things around that. Because I always think you can’t know where you’re going if you don’t know where you’ve been. And there’s so much to learn from the past in terms of how they solve particular problems and how they ran their societies. And what they did are always left, you know, the breadcrumbs are always left for the archaeologists to figure out. And I find that that fascinating the fact that we’re still finding today with technology, like LIDAR, and that the lost city is one of the most recent books that I read around this where they use LIDAR, this new type of radar to really be able to look through the canopy and find out that there are these huge mega cities in South America buried under the forestation and that they’re just coming to light now. And then the fascinating aspects of them were you see that the cities were arranged, and they sort of match up to different constellations, or all these crazy things where they, you know, they, they built the buildings with an understanding of acoustics or the level of mathematics involved to do some of the things that they did that we would have thought there’s no way a primitive society can possibly have done these things. And there it is, the proofs right in front right in front of your face.
Gabe Smith 28:04
Alright, Tom. Well, thanks a lot for joining us. Really great conversation. I enjoyed it very much.
Tom Roberts 28:09
Gave it’s always good seeing you and I think there’s no hotter topic right now then, then pricing. It really matters to companies’ success or failure. And it can be the difference between success and failure for companies these days.
Gabe Smith 28:24
Absolutely. Well, I share that opinion and I appreciate yours so thanks so much for being a guest and thanks, everyone for tuning in to Pricing Matters.