Matt Johnson is director of the Silicon Valley office of Simon Kucher & Partners, a consultancy on pricing strategy. BtoB recently asked him about trends in pricing automation.
BtoB: What are the roots of pricing automation?
Johnson: It originally was adopted by airlines, rental car companies and hotels. For airlines in particular, they lost more money from deregulation after 1978 than they had made in the history of their industry. They looked for tools to take transaction business out of human hands, systems that went from a simple overbooking forecasting focus to very sophisticated margin-improvement systems now credited with regular annual revenue increases of 6% to 8%.
BtoB: Where can pricing automation impact b2b companies, which traditionally have far fewer transactions to price?
Johnson: Chemical companies, for example, may have several hundred products whose pricing depends on value-based segmentations. It also helps those distributors with hundreds or thousands of products and hundreds of salespeople, to assure they're not discounting when they don't need to. Certain heavy industries and semiconductor companies also fit in this category. And it's particularly valuable in pricing for the 80% of your customers who provide 20% of your business.
Johnson: Because these entail many small transactions that would take too much human interaction in analyzing them to improve margins. But there's tremendous value hidden here.
BtoB: Wouldn't setting prices based on cost plus profit work ?
Johnson: Cost pricing seems effective on the surface because you are in theory ensuring an adequate profit margin on each product. But in reality you're creating a one-size-fits-all price for the product that will be too high for some customer segments and well below what other customers would have paid.
BtoB: And the implementation?
Johnson: The challenges generally arise from the initial need to develop a more segmented pricing strategy. But compared to other kinds of projects, spending a couple of million dollars on pricing systems is a relatively cheap investment, considering you can net an eight-figure return. The ROIs are gaudy. I've never seen one of these things fail on ROI.