If you’re considering investing in price optimization and management and/or CPQ software, you might be wondering what sort of return on investment (ROI) you can expect. Without a clear answer it’s hard to get budget, buy-in from executives and you might as well kiss the solution to your revenue and margin issues good-bye.
We’ve had a lot of experience helping our customers to understand the payback they can get from pricing software so that they can track the success of their investment and go forward to get support for the purchase.
There are several KPIs that pricing improvement projects can move, such as win rates, resources needed to carry out processes, deal cycle times, etc.
However, in this article we will focus on the 4 factors that have a direct positive impact on ROI on pricing software, which generally plays out in revenue and/or profit improvements of up to 50-600 basis points.
The Four Factors that Affect the ROI of Pricing Optimization Software
Several studies (McKinsey, Deloitte, Gartner etc) have been done on the 50-600 basis points payback you can expect to get from pricing software. The range is quite large as there are several considerations in play that will influence your ROI:
Your current level of Pricing Maturity
Your Pricing Power and Gross Margins
Your organization’s willingness to change and the people involved
The capabilities, flexibility and time to value of the software you choose
We see companies at all levels of pricing sophistication and maturity and have a methodology which allows companies to self-assess their pricing maturity in a variety of categories.
Most companies we deal with are beginning their journey to pricing maturity and are investing in pricing software and people and process to move them up the ladder. The less mature you are as an organization; the more price and profit potential exists.
That said, even the most sophisticated companies view pricing as a journey, not a destination, meaning there are always opportunities to improve it, and in today’s turbulent times, the ability to flex your pricing strategy and tactics is a competitive advantage for those who are able to do so.
Market Forces Affecting Your Pricing Power and Gross Margins
Many market forces can influence pricing power and gross margins. We could write an entire article on this but will keep it short here. Here are some market forces to think about when considering what level of pricing power (or ability to move price) you have:
The level of direct competition you are facing. The more competitive the market, the less pricing power you have.
How commoditized your products are vs. more specialized or proprietary. The more specialized or proprietary, the more pricing power you have,
The level of transparency in pricing in your industry. In other words, can your competitors see your prices and vice versa? The more transparency, the less pricing power you have.
How complex your pricing waterfall is?In other words, how many levers can you pull? The more levers like surcharges, diverse types of incentives, promotions, etc., the more power you have. This is also related to transparency.
How much variability in your prices are there across your customers, which is sometimes a function of different end use applications for your offers. The more variability, the more pricing power you have.
Your Organization’sWillingness to Change and the People Involved
Those that are excellent at change management achieved 6x the outcomes of those that were poor, and even being fair gets you 3x better outcomes.
Without effective change management even the best pricing software can struggle to provide the maximum ROI.
If you’d like to move the needle on achieving “excellent” change management, then here are a few tips that can help:
Get executive priority and buy-in to lead change in the organization. This is huge and perhaps the hardest part to get and maintain, simply because of the competing priorities that executives face
Prioritize the needs of users of the application like sales and customer service can help tremendously
Start small and going incrementally within a larger vision helps a lot.
Reward and praise those who adopt the new
The Capabilities (Breadth and Depth) and Flexibility of the Solution you Choose
We know that you will need to make changes to the pricing processes as markets change. If you want to continue to get payback on your pricing software far into the future, then you need a solution that is easily adaptable and innovative. The last thing you want is to spend months on a project that’s you’ll struggle to configure to your dynamic needs. So
So, before you choose here are some questions to consider:
If you plan to start with pricing analytics, check what other solutions you may eventually need – will your pricing analytics solution require multiple capabilities?
The most innovative companies stay competitive. Ask yourself, “Will this solution provider help me to stay competitive with their innovations? Do they innovate at all?”
As you add or change IT systems, how easy will it be to integrate them with the pricing software? Will it affect the quality of the software?
Calculating the ROI of Pricing Optimization Software for Your Business
By understanding the factors that affect ROI and what you can do to influence them, you stand a higher chance of achieving your 50-600 basis point increase in profit goal. This will also give you the confidence to ask for the buy-in and budget to choose the price optimization software of your dreams.
Gabriel Smith is the Chief Evangelist at Pricefx. He has 20 years experience in CPQ, enterprise software, SaaS, with particular expertise in lead to order, pricing, incentives, product management and solution sales. He has worked with market leading companies like 3M, Anda, Avery Dennison, Cisco, CertainTeed, Cox, IBM, Seagate, and Sonoco to improve their profit and processes through digital transformation of their pricing and CPQ processes and using AI to optimize pricing. He is a father of 2, attended UC Berkeley and lives in San Francisco.