Why You Need Pricing Software – Building A Business Case
The question of whether to purchase a pricing solution is a difficult one. Do you really need pricing software? Can’t you do without it? And if you’ve decided that pricing software is a need and not a nice to have, you’ll have to convince others. You might discover that it’s not just other projects that you might have to go up against but inertia.
At Pricefx, we’ve spent many years helping companies satisfy their need for cloud-native pricing software, by providing a robust, cloud-native pricing solution with which they can achieve all their pricing goals. And in this time, we’ve heard every reason under the sun why companies feel they either need or don’t need pricing software.
As part of a series exploring these two points of view, this article will dive into the top two crucial (though rarely highlighted), reasons why you do indeed need pricing software and how you can make your business case for pricing software in your company.
What is Pricing Software?
Pricing software uses machine learning and algorithms to process large amounts of historical data in order to make optimal price recommendations. Moving you away from a cost-plus pricing approach, it supports price segmentation and value-based selling to help you achieve your best possible price.
It also provides the tools to uncover new opportunities, maximize profit, reduce risk and help select the best competitive pricing strategy, taking market conditions, competitive analysis, promotions, product availability and revenue goals into account. By bringing all your data into one place and enabling deep granular analyses and simulations, it helps you make better pricing decisions that have a real positive impact on the bottom line.
A pricing solution also enables the agility companies need in today’s world to adapt and survive.
Do You Need Pricing Software?
At Pricefx, we often hear customers say, “I understand the value of your software and it sounds great, but I simply don’t need it.”
As far as they are concerned, they’re doing just fine on their own. The benefits of pricing software don’t outweigh the efforts or resources it would take to implement and use it.
Putting aside the many common (unfounded) fears companies have around investing in pricing software (like complexity, rigidity, cost, which we’ll discuss in our upcoming article Why You Don’t Need Pricing Software), we believe there are only really two reasons why pricing software might actually not be for you.
- You have no interest in business growth. Now we really do mean this. Some companies aren’t interested in rapid growth. They’ve carved out a nice niche for themselves and will be OK. And if that’s you, then that’s fine. If however, your business model is about growing your product count, customer base, and market share, and protection from market upheavals, competitors swooping in, or market uncertainty, then you’d see massive improvement by investing in pricing software
- The upfront works seems insurmountable. Price optimization software helps you optimize your pricing (unsurprisingly), but the solution doesn’t do that by itself; you still must get your data ready, set your goals, define what you want to maximize, input the constraints, etc. So, if you don’t want to have to do any of that, and if achieving greater profitability is not of interest, then pricing software probably isn’t for you.
You see, it’s actually reductive to suggest the big value of price optimization software is that it suggests better prices. What it actually does best is help you take control of your pricing and enable scalability, which in turn helps you achieve better profitability.
Let’s look at how.
The Impact of Governance on The Bottom Line
Optimization is not simply about finding the top price your customers will pay and charging that. Nor is it an overnight miracle performed by a bit of magical technology. It is a process. And that process starts with doing things the right way.
You don’t expect your seeds to shoot, grow and fruit overnight.
You know you need to spend a few weeks lavishing them with love before you start to see results.
The same goes for pricing software.
By spending time improving your pricing processes and approval workflows, developing clear pricing guidelines and guardrails, enabling more accurate quotes, accelerating turnarounds, augmenting customer service, and ensuring overall pricing efficiency…only then can you optimize win rate, profit and revenue.
Let’s take a closer look at what we mean.
In this illustration, the Center (C) shows the median of the actual prices and the curve represents actual attained prices. Contracts that pay more or less than your asking price are your outliers.
With half of customers paying above your asking price (good outliers) and half paying below (bad outliers), you’re losing any benefit from your higher-priced deals as they’re having to compensate for the lower-priced ones.
Why do so many contracts come in under asking? Whether through negotiation, discounts, rebates, or sheer desperation, overzealous sales reps motivated by winning the deal are giving away your margins hand over fist.
So, you’re losing profit, what do you do? Increase your prices. Good idea.
However, while a price increase will widen your profit margin, it won’t actually fix your outlier problem. It will simply move your curve to the right (blue line).
You still have many customers negotiating your salespeople down and eating away at your profit margin. So, instead you should be focusing on reducing your bad outliers—the frequency with which your contracts are being sold below asking.
Let’s look at how this worked for a real customer of ours: In 2019, 55% of all their prices were below the center. But in 2021, after putting governance in place, just 45% of deals fell below. The 56% of the volume that sold below center in 2019 was reduced to just 38% in 2021. So even the bigger deals moved up.
We then did a practical simulation where we set floor, stretch and target prices and decided that for every new customer and for every existing contract renewal we would accept no lower than floor price, even though we knew we would lose customers.
Of the customers below floor price, we applied the enforcement to 20% of them, and simulated that 75% (of the 20%) would pay exactly floor, and the remaining 25% would go elsewhere. Even though we’d have lost these customers, we still made somewhere between 0.5% and 1.5% more profit than had we done nothing.
These results are quantifiable and directly impact your bottom line. And can be generated from governance alone.
So, what do we mean by governance and what would you need to achieve it?
- A central hub for all things pricing where you can get your processes under control and gain visibility of your entire portfolio.
- A change of focus from winning the deal to enhanced customer service delivery.
- A clear-box approach to pricing so that Sales can understand prices and defend them when quoting.
- Clear pricing guidelines and guardrails to help uphold price integrity and get rid of bad outliers.
- Clear view of the waterfall with built-in rebate management capabilities to ensure overall deal profitability.
- Sophisticated tools to support Sales when dealing with complex contracts and negotiations.
- Regular visual reports of financial performance (profitability and causality).
How Pricing Software Supports Business Growth
The other key area of value that pricing software brings is in helping you do things better, with greater accuracy, and more efficiency, so you can get more done in less time and spend the saved resources on growing your company.
If your sales team can answer twice as many enquiries, send quotes twice as fast, and seal the deal in half the time, then you’ll be delighting double the customers without having doubled your headcount.
So what would you need to enable this kind of scalability?
- Seamless integration with your full technology stack for instant bi-lateral flow of essential pricing data.
- Automated processes that release pricing teams to work on more profit-driving activities.
- Greatly reduced manual work resulting in error-free quotes and happier customers.
- A central hub for all pricing and order information that makes it easy for sales reps can cover for each other, leading to a better customer experience.
- Strong centralized cost-price-quote (CPQ) capabilities supported by automated approval workflows that dramatically reduce quote turnarounds to seal more deals faster.
- Automated dynamic repricing across your entire portfolio based on real-time inputs from the market, competitors, vendors, and indices.
- Value-based pricing that helps you maximize profit on every deal by automatically adjusting prices to match customer segment willingness to pay.
All this without increasing either your pricing or sales teams.
A Business Case for Pricing Software
If you’re getting ready to face the C-suite with proposals for investing in pricing software and are meeting resistance, then your argument for how it will dramatically impact the bottom line through governance and scalability is indisputable.
We’ve been in the business of pricing software a long time. If it didn’t deliver the goods, we wouldn’t still be here. The payback of pricing software is tremendous.
Remember, ROI is founded not just on you knowing the right decision to take, but on having the ability to execute it.
This is what pricing software does.
It not only helps you uncover fruitful opportunities (even those hidden deep within the branches) but puts you in much better control of the execution of your decisions so you can capture the rewards.
What’s more, it can do this at scale, by bringing down your pain points, improving pricing efficiency, introducing governance, and enabling optimization.
It’s not going to write a new strategy for you. Nor is it going to land in your lap ready to work its magic. There will be work to do to ensure you’re getting the most out of it and your data that you possibly can. It’s not a set it and forget tool either. But what it is going to do is address scalability and profitability through greater efficiency and governance to enable you to grow as a business with just the team you have now.
And while competing projects or initiatives might cost less to set up, how many of those would actually have a very direct impact on revenue and margin?
So, unless your company has little interest in growing or your pricing team little interest in improvement, you have a very strong business case to take to the big wigs.
To Pricing Software or Not to Pricing Software
In all honesty, while we often talk about the pricing software dilemma being a difficult one, we believe it’s a no-brainer. Your current processes are losing you money, not just through sub-optimal prices, but through sub-optimal processes.
Governance alone can deliver incredible results by bringing your pricing under control and giving it the priority it deserves. And the value of being able to scale your pricing processes in helping you reach your business growth objectives is enormous. These two often overlooked essentials of everyday pricing should be at the top of your business case for pricing software, because they show quantifiable impact on the bottom line and actively support company goals.
To further support your pitch, use our Margin Lift calculator to generate an estimate of the value you could achieve with our pricing software, based on your specific industry challenges and objectives.