A Primer on Pricing Software
Originating in the travel and hospitality industries as revenue management software, pricing software has been developed to serve industries ranging from retail to B2B to financial services and telecommunications. B2B pricing software got its start in the late 1990s, helping B2B manufacturing, distribution and industrial services companies analyze, manage, optimize and execute prices. The sophistication of the algorithms, ability to process large amounts of data quickly, and the delivery of pricing software has changed drastically, but many of the core B2B pricing challenges still exist, and have only been exacerbated by the pace of business and technological challenge. In this post, we’ll explain pricing software in the context of B2B, including the types of pricing software, who can benefit from it, the typical realized benefits, and tips for selecting the right pricing software vendor for your business.
Types of Pricing Software
Pricing Analytics: This is most often used in conjunction with price management or price optimization software to help businesses understand their current pricing performance and where they may have opportunities to improve. A primary example is margin driver analysis, which isolates the factors that drive margins, lights up the trends and makes actionable recommendations. Often presented as a waterfall chart, the output gives companies a holistic view of changes over any user-defined time period and explains exactly how much of the margin change is due to price, volume, cost and mix. Take a look at a more detailed example here.
Price Management: Pricing teams most frequently use this type of software to set prices for new products, update existing price lists or matrix prices and mass update customer-specific prices. A common example is the need to update global price lists and cascade those prices changes to multiple country price lists. You can view an example demonstration here.
Price Optimization: This software utilizes artificial intelligence to measure price elasticity and predict the outcomes of various pricing strategies to generate revenue- or profit-maximizing prices. Read our in-depth explanation of price optimization.
Price Execution: How prices are ultimately calculated and delivered directly to the end customer or a sales rep for the purpose of creating or updating a quote or agreement, or entering an order. A powerful pricing engine that uses a high-availability API can perform complex price calculations and deliver prices in real-time in any sales rep- or customer-facing application, such as an ERP system, CPQ tool, CRM or eCommerce site. You can view an example demonstration here. Another common price execution use case is deal or agreement management software, whereby sales reps actively manage customer-specific prices, contracts and agreements.
Using Pricing Software to Tackle the Most Common B2B Price Modes
Different types or a combination of pricing software are used to manage the various price modes in B2B. A price mode is a framework for understanding how a company arrives at a price for a given customer, which typically takes on similar forms across many industries in B2B. Price modes (pricing architecture) each have their place but tend to drift away from their original intent and are used inconsistently — this is where pricing software becomes particularly helpful. Here are the four main price modes and the common challenges with each:
- List Price
- Price lists tend to quickly become stale, as product-value relationships, such as good-better-best and private labels are not reflected, and cost changes are not pushed through intelligently or quickly enough.
- List prices should be a company’s North Star, the reference point for discounts. The increasing number of products, relationships and competitive considerations often render the list price meaningless when managed manually, and therefore unusable as a reference price.
- B2B companies often further complicate list prices by artificially inflating the price to try to influence pricing decisions made by sales reps — a tactic that rarely works in practice.
- Tip: Price optimization software can be used to optimize and fix list prices at the outset. Price management software, accompanied by price analytics software, is best suited for ongoing management of list prices.
- Matrix/System Price – Grid where groups of similar customers and products are assigned to specific matrices. When assigned correctly, this can be the most profitable price mode. However,
- Often sales reps have the power to reassign customers to more favorable price tiers, causing nearly all customers to get the lowest price. This, combined with stale list price reference values, causes customers to be mis-assigned and receive prices that don’t reflect their relationship with the company.
- Matrix prices often lack the proper level of granularity, or dimensions, to ensure the prices are market-aligned and competitive enough to win the deal; thus they are ignored by the sales reps in favor of overrides and special price exceptions. Data science-driven price segmentation, which accounts for the customer, product and order dimensions that statistically influence price response, is required to achieve the necessary granularity to make prices relevant and gain market adoption. Establishing this segmentation structure may exceed the resources available in-house.
- As costs change, matrix prices are often cumbersome and difficult to update. Even when this process is relatively efficient, if a small percentage of revenue is transacted on the matrix, companies may only recoup a small portion of a cost increase through price, as other price modes are harder to immediately affect.
- Tip: If your business only requires a simple matrix structure with one or two differentiating factors, price management software is well suited. Price optimization software is strongly recommended to ensure customers and products are assigned and grouped correctly, the right level of granularity exists, and price elasticity is used as the basis to set prices.
- Customer-Specific Prices – Two types exist in this category, customer-specific price exceptions and customer contracts (largest and most valuable customers).
- B2B companies often see a proliferation of customer-specific price exceptions when matrix prices are not market-aligned. These often lead to margin leakage due to poor price initial setting, poor record creation/management, lack of an approval and ongoing review process, and a fundamental lack of strategy behind the process.
- It’s not uncommon for hundreds of thousands to millions of these pricing records to exist in a business, creating an overwhelming administrative burden, and making it difficult to impossible to execute price changes as costs or other dynamics change.
- Many price exceptions are set with no expiration date, at a net price level or a generic markup over cost and fall victim to the “set and forget” conundrum.
- Since customer contracts are reserved for key customers, sales reps are very protective of them. It can be a challenge to enact a price increase, regardless of how outdated the contract.
- Tip: A combination of price optimization and price management software should be used to generate and mass update customer-specific prices. The key is to ensure you have a robust deal or agreement management software that seamlessly connects to the price management/optimization applications so that sales reps are alerted to customer-specific price changes and can take action.
- Override Prices – Prices that, for any number of legitimate reasons, are deviated from list or matrix in a one-off, negotiated capacity.
- When left without guardrails, these can lead to rampant over-discounting, based on rule-of-thumb margin targets, inconsistent prices from rep-to-rep, and misaligned prices.
- Attempts to institute approval processes can often result in delays and lower win rates, if not instituted appropriately.
- Tip: Price optimization is best suited to generate market-aligned negotiation deal envelopes that reflect the uniqueness of each and every selling situation. This gives you the best chance of sales reps accepting the guidance window and reducing over-discounting behaviors.
Typical Benefits of Pricing Software
The average B2B company is experiencing profit margin leakage from pricing inconsistencies and misaligned market pricing ranging from 1.8% to 13.4%., based on benchmark data.
Misaligned pricing refers to transacting business at prices that fail to align rationally to customer size, order size, product value (good-better-best) and other key value dimensions. For example, a small customer may receive a better price than a large customer for the same product, all else being equal. It also includes pricing that does not quickly and accurately account for cost changes. Risk exposure to the latter is only increasing as cost changes occur more frequently and unpredictably in a global recessionary environment.
Inconsistent pricing means that prices are transacted below a minimum margin threshold, showing exceedingly wide variances under similar selling circumstances. Price grooving is also a common source of margin leakage, creating inconsistency as prices are rounded to the nearest dollar or offered at only discrete margins, such as 30%, where perhaps a margin of 33.5% would have been sufficient to win the deal.
Not all of the lost profit identified above is recoverable. Pricing software typically delivers between 100 and 300 basis points of gross margin improvement, with price optimization software typically delivering the largest return. Companies also see significant efficiency improvements in terms of streamlining previously manual and time-intensive pricing and quoting practices and reducing pricing errors.
Who Can Benefit from Pricing Software
According to Gartner’s Market Guide for B2B Price Optimization and Management Software published in March 2019:
“PO&M software is not a good fit for every organization, but Gartner recommends considering it in one or more of the following situations:
- The volume or rate of list price changes is impractical or expensive for people to perform without automation.
- Price management is distributed across multiple regions, but requires some centralized control.
- The organization seeks to leverage advanced statistics and machine learning to fix suboptimal pricing practices identified in historical deals. It has a large volume of clean, historical sales transactions with which to train the PO&M models.
- The organization wants to calculate prices and discounting thresholds in real time based on factors such as the type of customer, the mix of products, product costs, product availability, competitors, geography and corporate priorities (for example, targeting revenue or margin).”
Selecting the Right Pricing Software Partner
Reputable analyst firms such as Gartner and IDC often produce research on the strengths and weaknesses of each pricing software company. Here are some key considerations:
- Experience in your industry or experience solving a similar pricing challenge
- Technology stack of the pricing software vendor and ease of integrating into your systems. Tip: Cloud-native architecture, multi-tenant software-as-a-service provides the greatest flexibility, scalability and negates the need for costly upgrades in the future
- Pricing software capabilities
- Speed of implementation
- Return on investment
- Customer satisfaction
- The vendor’s ability to understand your business and fit their solutions to your business
To learn more about Zilliant’s pricing software solutions, schedule time to speak with one of our experts.