Crossing the Chasm

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Crossing the Chasm

By Tim Clark - 04/01/2006

Price optimization tools are complex and require more user care than typical applications, which is why it's still challenging today for companies to implement pricing functionality. "This type of solution hasn't officially crossed the chasm yet," says Noha Tohamy, principal analyst, Forrester Research. "It's still being heavily utilized by early adopters."


The First Step

An important primer step to realizing price optimization benefits means understanding the extension between price optimization and price management. Price management is the first step that both manufacturers and retailers look at to establish visibility of pricing across their organization. Across most industries and companies pricing functions are distributed across numerous departments. "Sales owns some of it while marketing also owns a piece so very few companies actually have a pricing group within their system," says Tohamy.


Companies typically end up with a lot of price rules as they relate to specific customers, which get propagated down to the sales force.


"Essentially, you have to do your homework to understand how bad your pricing practices are before you begin to think that optimization is going to save the day," says Tohamy. "Most of the ROI comes from organizational changes generated by advanced technology."

Five to seven years ago, Tohamy says price optimization was more manager driven. Now it reaches the director and VP level. "Salaries and number of professionals in the pricing area are also growing."


Unleashing the Power

Price optimization can dramatically increase top-line margins for companies -- from high, single digits to low, double digits. A global distributor that Tohamy worked with was able to realize an 11 percent spike to its top line margin using price optimization.


In the CG realm, successful price optimization has a lot to do with managing promotions. Promotion price optimization determines the net effect or impact of the promotion. This means understanding what demand lift looks like and what kind of dip will be experienced after the promotion runs its course. Cannibalization and halo effects also need to be determined. How these factors play into marketing and store execution is paramount. "If these constituents aren't established, the execution falls flat on its face and nothing really happens," says Tohamy. "It's a process/organizational change where close follow up on promotions when they hit the store is required."


At the end of the day, after successfully crossing the aforementioned price optimization chasms, companies should look to feed all types of historical data about customers into an optimization engine to segment most profitable customers based on sales, pricing and overall relations.