Analyst Perspectives

I wrote last year about how interest in pricing management is now expanding from the traditional use cases in industries such as manufacturing and chemicals. In part, this has been helped by technology changes that are allowing vendors to offer the advantages of pricing optimization and management without the “science project” approach, which has previously convinced many that the returns did not justify the disruption and time to value of traditional initiatives. All three parts of a typical pricing optimization and management project: data collection, analysis and operationalization, can now be much lighter touch in terms of effort, resources needed, and time spent.

For many organizations, what is driving this new interest is the impact of two distinct market forces. One is the increased complexity of what it means to “sell” for most organizations. Historically, business was linear; businesses made goods and services that they sold, either directly or through distribution networks. And for the most part, goods and services were sold on a one-time basis. But much of modern business is different. There is not just one way to sell. There is not just one pricing and revenue model. Omnichannel buying means customers engage in multiple ways, via phone, in person, text, chat or e-commerce and self-service portals. For those organizations that sell physical goods, many are looking at the opportunities for new revenue streams made possible by adding complementary digital services and products. This is resulting in more complex offerings that include bundled products and services, with some products and services originating from third parties.

The other distinct market force is the increasing focus on margin and profitability. And although this can be said to always be of concern, arriving at these numbers is made more difficult because of the differences in cost to serve for the differing sales channels as well as the differences in revenue treatment resulting from the addition of subscription and usage pricing.

Helping price optimization to become increasingly viable is the much-improved availability of timely and accurate data. Coupled with advances in the interoperability of technology, this is making it now possible to have margin and profitability as part of the deal approval process rather than as an analytic and reporting functional that is restricted to reviewing past deals. And whereas pricing itself does not have to be a function of cost, as margin becomes a key arbiter of the quality of a deal, margin itself becomes the value to optimize for, not just revenue. For this to happen when putting together a quote, built-in guardrails can include pricing suggestions that incorporate optimization for margin, including cost of goods sold, volume discounts, rebates, cost to serve based on channel, impact of deferred revenue from subscriptions, and allowances for sales commissions. These guardrails, built into the process at the point of sale, support a dynamic deal review, rather than the more traditional, manual, offline process typical of many B2B sales. Most typically, these capabilities are best delivered through a configure, price and quote (CPQ) application that, in addition to accessing pricing, can also support rules for products, services and bundled configurations, as well as quickly generate a digitally trackable, visually attractive quote.

More advanced applications visually present this potentially complex information using such graphics as yield curves or price waterfalls, showing the difference between list and proposed selling price. These can also be linked to the rules underlying the guardrails with intelligent routing for approvals at the appropriate level. It’s also important for this approval process to be accessible via mobile phone and tablet, as approvers do not always have access to a laptop of desktop PC. Managing this within spreadsheets will quickly become impractical. And, in fact, we assert that by 2025, one-quarter of all organizations will have a non-spreadsheet-based standard pricing application to provide a uniform approach to support all revenue channels.

Organizations that perhaps have seen pricing as simple as cost plus, or “follow the leader” and modeled in spreadsheets, should review their current approach. Complexities arising from the adoption of omnichannel selling and mixed pricing and revenue models, such as with the addition of subscription and usage, will make this approach impractical. Understanding the cost profile of different sales and delivery channels as well as the implications of bundled products and services, combined with pricing analysis, enables organizations to model and account for volume/revenue vs. margin tradeoffs.

Organizations led by the CRO and revenue operations team, in conjunction with the CFO’s and the CIO’s offices, should take the opportunity to review their existing systems and processes. Having this price and margin review as a part of the selling process, not as an after-the-event financial analysis, will result in more sustained and profitable business. And if they are not looking at this, they can be assured their competitors probably are.

Regards,

Stephen Hurrell