In many industries, pricing decisions and implementation of pricing systems require analysis, workflows, algorithms, and IT interfaces that are tailored to the available data. In this Simon-Kucher Engine series, we discuss the advantages of adopting specialized pricing software and look at the different use cases.
The future of pricing is in software. In many markets with high price fluctuation, it’s already an integrated part of the sales and distribution process. The frontrunner has traditionally been the tourism industry, where each price from airplane tickets to room booking is automatically tailored to a specific situation and circumstance. It’s foreseeable that with expanding digitalization, pricing software will soon be integrated into all commercial industries.
Laying the foundations for pricing is a complicated and time-consuming task. Pricing managers need all the information at hand to analyze, determine, and implement the “right” prices. These tasks are especially complex if a company …
- … has product portfolios that include several hundred thousand or even millions of units (e.g., spare parts manufacturers, wholesalers)
- … needs to make millions of price changes over of a year (e.g., travel fares, e-tail)
- …. has a large customer base with a complex discounting and pricing system
- … conducts price negotiations that can lead to individual prices for nearly every transaction.
Functions of pricing software
Although there are various types of pricing software, we recommend using software that is tailored or at least suited to your industry. A variety of functions are available depending on the industry focus of the software:
- Price analysis is the ability to use internal and external data to analyze pricing trends, sales and market data, and profit leakages to help form pricing decisions.
- Price management covers the administration of different price lists, as well as assignment to specific customers or customer groups.
- Price crawling collects competitor data, e.g., using web scraping. With price crawling, competitor prices are usually extracted from eCommerce portals or the competitors’ online sites. Technically, the realization of this function is simple, but it requires maintenance whenever the data structure of the target website changes. Therefore, these functions are typically provided by specialized providers.
- Price optimization offers configurable algorithms, formulas, or AI for calculating and optimizing prices, often for thousands of products. When done frequently and close to real-time, this results in dynamic pricing.
- Discount and bonus management helps to set customer-specific price conditions or trade terms. In the case of rebates (off-invoice), e.g., bonuses or kickbacks, it can calculate the provisions and payment modalities.
- Price recommendations are algorithms or logic-based models that provide the sales staff with a target price or range for negotiations.
- Deal desk and quoting workflows support the pricing approval process as well as configure and create quotes.
- Promotion management and mark-down pricing is used for special offers and price reductions in sales.
Value case for pricing software
Introducing pricing software is a major investment in terms of the license fee and implementation efforts. It requires the time and resources of the organization involved. Therefore, it is important to quantify every benefit this investment will have. These benefits can be categorized into four categories:
- Faster response time
In the past, numerous different products, customers, and individual discount agreements had the consequence that often weeks or months were required to derive new price listings. Pricing software, however, can immediately target bottlenecks in the data collection process. Instead of needing “four months” to determine the quarterly price lists, pricing software can instantly arrive at the optimized result for the current market situation. Quantification of this benefit is indicated through improved pricing and therefore more profit and ideally also more volume.
- Transparency and consistency
Pricing decisions, especially in a B2B environment, are often decentralized. Dealing with high price fluctuation, even experts can find it difficult to gain insights into micro pricing decisions, far from being able to influence them. Pricing software can provide increased transparency, comparability, and control over these processes. And these benefits can be quantified as fewer pricing mistakes and leakages.
- Efficiency and automated approval processes
By automating processes, fewer resources are needed for the same amount of work. This solves the problem that pricing departments are often understaffed, so pricing software can relieve employees from time-consuming data work and allow them to focus on strategic tasks. In addition, the software creates an efficient workflow and solves many bottlenecks. For example, the manager who oversees the approval process might be on leave or rejects the new price listings. Pricing software supports the process by digitizing the release workflows so that superiors can simply approve or adjust price suggestions.
- Better prices
Pricing software makes it possible to implement sophisticated algorithms and logics to optimize prices. In certain industries, AI-based algorithms are used to calculate prices based on predicted outcomes (i.e., volume changes) of potential price changes. Such algorithms work in stark contrast to manually calculating prices, which is often an error-prone task and does not allow for such granularity and analysis of nearly every influencing factor. Pricing software can calculate prices in an instant and any changes in the pricing logic are documented with an audit trail. Eventually, the pricing software collects its own data to make future pricing decisions.
In this article, we have discussed how faster response, transparency, efficiency, and better prices contribute to the business case of pricing software, and which functionalities make its usage advantageous for companies. In the next parts of this series, we will also cover how different types of pricing software can be used in different industries. Stay tuned for the best practices and challenges of implementing pricing software.
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