Based on the upbeat results of some business-to-business (B2B) pricing vendors in 2011, one could easily assume that the pricing software market’s value proposition is well known and accepted by companies en masse. At least in the retail sector this assumption could be validated by IBM’s recent acquisition of the retail pricing and assortment optimization leader DemandTec.
But as the title of my recent article intimates, the value of B2B pricing software has yet to become universally known and appreciated (see article). I thus recently engaged in an in-depth discussion with two top executives at two vendors in the deal-intensive B2B pricing market: PROS Pricing and LeveragePoint.
PROS (NYSE: PRO) is a market leader in prescriptive pricing and revenue management software, with more than $468 billion (USD) in revenues under management. Companies around the world in the manufacturing, distribution, services, and travel industries use PROS to take control of pricing through data-driven insights, enabling them to increase revenues and profits, defend and grow market share, and increase business agility. Initially focusing on business-to-consumer (B2C) markets (i.e., airlines), for more than 25 years PROS has been helping customers understand transactional profitability, forecast demand, streamline pricing processes, establish pricing strategies, as well as recommend real-time, optimal prices for each individual product, service, and transaction. With more than 500 employees—100 with post-graduate degrees and 25 with PhDs—PROS serves over 150 renowned customers in more than 50 countries.
LeveragePoint is a private novel provider of a software-as-a-service (SaaS) platform for B2B pricing, officially launched in 2010. The platform is available for an annual subscription and helps users set and manage prices and create the value propositions used by sales personnel. The company’s sales force is provided with a mobile solution (via either iPad or Android tablet) for value-based pricing and selling. Feedback from sales is automatically sent back to the head office for analysis. LeveragePoint’s users typically benefit from higher-than-average prices, higher price capture in negotiations, and faster sales cycles. (For more information on LeveragePoint, see TEC’s recent blog post.)
The discussion that follows involves Tim Girgenti of PROS and Steven Forth of LeveragePoint. Tim Girgenti serves as chief marketing officer (CMO) at PROS, leading its global marketing teams focused on PROS manufacturing, distribution, and services markets. Girgenti brings to PROS a wealth of experience in creating and leading revenue acceleration strategies for B2B software companies. In his capacity as managing partner at Lifecycle Marketing, Girgenti developed strategic marketing programs for mid-market B2B software organizations, including FileNet (now IBM), VMWare, Guidance Software, and BindView (now Symantec). His clients achieved organic sales growth by aligning strategic value propositions with industry-specific business challenges and then deploying integrated sales and marketing programs that resulted in greater market awareness, increased deal flow, and improved success rates.
A graduate of the GE Capital Leadership Development Program, Girgenti spent 10 years honing his business acumen in sales and marketing positions of increasing responsibility within GE Capital and Wells Fargo Bank. He earned an MBA from Brigham Young University and BA from Wake Forest University.
Tim Girgenti, CMO of PROS
Steven Forth is chief executive officer (CEO) of LeveragePoint and sits on its Board of Directors. He is responsible for strategic direction, finances, and key relationships. Prior to leading LeveragePoint, Forth was the vice president (VP) of Online Solutions at the eMonitor unit of Monitor Group. Forth has extensive experience with technology start-ups. Before joining Monitor, he co-founded the identity and social media company CrowdTrust and was CEO of Recombo. He is active on many of the LinkedIn Groups on pricing and sales operations (see his LinkedIn profile).
Steven Forth, CEO of LeveragePoint
Talking to PROS’s and LeveragePoint’s Thought Leaders
While I thought these two potential competitors would differ in their B2B pricing approach—i.e., history-based market segmentation to find the customer’s willingness to pay (WTP) or price sensitivity versus value-based pricing and sales discussions with the customers—I expected that they would agree on the general assessments about the market’s current state of affairs.
Our questions and Girgenti’s and Forth’s respective answers were as follows:
TEC: Do you strongly (even passionately) believe that the companies that still manage their pricing in a pedestrian way (via spreadsheets) are reckless toward their shareholders? Can you please elaborate on their potential risks?
TG: I hesitate to call executives reckless, as they are working hard to make prudent business decisions to stabilize and protect their companies in this volatile economy. In fact, more often the issue revolves around executives not knowing that pricing software drives extraordinary profitability or even that there are alternatives to spreadsheets. Profitability is a major contributor to value creation, so it stands to reason that business leaders should take advantage of every measure at their disposal to grow and protect their profits.
That being said, why leave the single most important profit lever—pricing—to spreadsheets, manual processes, and backward-looking tools? This is akin to landing a Boeing 747 at JFK International Airport with no air traffic controller. Certainly it can be done, but why take the risk, especially when pricing software provides a proven alternative? In fact, in its recent report on pricing software, Gartner states “the widespread use of spreadsheets for analyzing and managing prices is increasingly viewed as inadequate, if not harmful.”
Pricing software is the profitability safety net no company should be without. The best pricing software will detect profit anomalies, prescribe corrective actions, and enforce controls and compliance. It will also help companies pinpoint exactly where they have pricing power and where they don’t. Finally, the software allows companies to take rapid pricing actions when their markets or input costs change.
If that’s not enough reason to consider pricing software over spreadsheets, Gartner conservatively estimates that pricing software will help increase gross margins, on average, by more than two percent. For a $1 billion (USD) manufacturer, that’s a floor of $20 million (USD) in new profits, all without having to introduce new products or add more sales people. How many jobs would that save? What would that do for shareholder valuation?
SF: We believe that companies that are not focused on delivering differentiated value to their customers will be commoditized and eventually marginalized. Of course it is not enough to create differentiated value—one also has to be able to capture it in higher prices. Why? Differentiated value erodes as competitors enhance their own offer and more and more functionality becomes undifferentiated and gets captured in the reference price. Differentiation requires ongoing investments in innovation and market understanding. Investments that can only be sustained by companies with higher-than-average profit margins. Widespread adoption of value-based approaches will drive differentiation into the economy and create a more resilient and profitable economic base.
So pricing is essential to innovation and economic prosperity. In his lead article in the January 2010 issue of the Harvard Business Review entitled “The Age of Customer Capitalism,” Roger Martin called on companies to optimize the value they create for customers and argues that only by doing this will they ultimately optimize shareholder value. Value-based pricing is at the heart of “customer capitalism” and companies that fail to adopt it will see profits falter as they are first commoditized and then marginalized by new and more differentiated competition.
This process is simply too complex and dynamic to be managed using spreadsheets or communicated using Microsoft PowerPoint. Pricing requires the active engagement of product development, marketing, pricing, and sales. Not only the same concepts and data must be shared, but also presentation has to be tailored to the business needs of each of these groups. One size does not fit all. And pricing is a dynamic and forward-looking discipline. Value depends on many factors external to the company. Value drivers can include variables such as labor costs, scrap costs, commodities prices, interest rates, and so on. Keeping all of these updated through a spreadsheet and then communicating them throughout the organization is a near impossible task.
More importantly, tools such as spreadsheets do not support the communication loop in which information gleaned from sales conversations with customers is cycled back to pricing, marketing, and product development. It is difficult to identify patterns and trends using many different spreadsheets to calculate value and prices and then a plethora of invoicing, PowerPoints, PDFs, and Web sites to communicate prices.
TEC: What is your view on the relationship between pricing optimization and management software and business intelligence (BI) solutions in terms of providing actionable (predictive, descriptive, and prescriptive) insight?
TG: Every company is facing a new business reality with the volatility in raw materials, currency fluctuations, and a globally competitive marketplace. Unfortunately, those factors aren’t going away, which is creating a crisis in business confidence. Executives are attempting to navigate risk and reignite growth while working to transform their businesses. It’s a slippery slope. They’re looking at ways to fight the business headwinds, navigate the landscape, and prevail against the storm.
I want to first reiterate that pricing in B2B environments is operational, transactional, and dynamic, not static. Against this backdrop, companies turn to technology to assist in making the best possible pricing decisions at the point of transaction. BI tools, while incredibly useful for other business needs, are static. They’re more like a map and simply do not match-up against the problem. They provide a picture of the landscape, but it’s up to customers to figure out the optimal path. BI only offers analytics without any guidance or direction.
Astute pricing software, on the other hand, is more like a global positioning system (GPS). It provides turn-by-turn instructions to help companies make optimal pricing decisions at a transactional, deal-by-deal level. And like a GPS, you still keep your hands on the wheel and make the turns yourself. You’re always in control, but with the confidence that you’re equipped with an intelligent guidance system, expressly programmed for your unique needs. Pricing provides companies with price lists, price quotes, and helps to set strategic relationships. In short, BI tools are descriptive, whereas leading pricing software is prescriptive. When it comes to the challenge of pricing, prescriptive guidance is far better.
SF: There are many things that can be learned from large databases of historical pricing data. The conventional pricing software vendors have an important role to play in such cases and go well beyond what any of the generic BI systems are capable of. The pricing waterfall is a powerful presentation tool. WTP is an important diagnostic tool that focuses thinking on a critical issue. Price banding, price, and price capture segmentation of customers (and sales teams) can provide important insights. But pricing data alone does not tell the whole story. Pricing and prices are influenced by many factors and there is data within many large companies that can provide insights.
Application of BI tools to data in data warehouses (many different types of data and not just pricing) can provide surprising insights. For example, combining cost and price data can be powerful—one company I know of discovered that as the price of certain commodities went up so did its ability to capture higher prices, but for other commodities a price increase led to downward pressure on prices. As the company used these commodities, they not only impacted the company’s own material costs, but also had a dramatic impact on profitability in different scenarios. Increases in certain commodities prices led to higher profits while others led to a double punch where not only did costs increase but differentiated value and prices also declined.
TEC: Why do you think pricing has been a neglected child of sorts in enterprises when it comes to information technology (IT) automation (some indications are that 95 percent of enterprises are still pricing manually or via spreadsheets at best) in spite of its importance in revenue generation, demand shaping, and profitability?
TG: While this is a new market, I wouldn’t characterize it as a neglected child. Commercially viable, off-the-shelf B2B pricing software as we know it today has only been available for the past five years or so. It’s simply a new entrant to the value-creation landscape. That being said, we estimate that hundreds of companies have made investments in pricing software in this short period of time.
Given the profound returns our solution provides and the competitive edge it creates, many successful companies are understandably reluctant to share their stories. As such, I would suggest that we’re in the midst of a quiet revolution—one that is overthrowing outdated notions of pricing practices, like one-size fits all, cost-plus, match-the-competition, and outdated pricing tools. This is an exciting time to be in our space.
SF: There are several intersecting reasons for this.
- Pricing has been positioned as a mid-level issue and has not had the attention of C-Level executives. Why? It was developed as a technical rather geeky discipline that did not attract people with the organizational or communication skills to have an impact at top levels in the organization. There are relatively few people like Dick Braun at Parker Hannifin (VP strategic pricing) or Stephan Liozu at Ardex (CEO of Ardex Americas) who act at a strategic level in their companies. In the 70s and 80s, US companies had become bloated bureaucracies and business process reengineering (BPR) probably was more important than optimizing for differentiation and customer value creation. A cycle of pruning was needed (think of punctuated equilibrium in evolutionary theory). We are now moving into a new phase in which the BPR and associated cost slashing has largely run its course.
- By focusing on the pricing function and relying on pricing scientists, the existing solutions have yet to create a software platform that is scalable across the organization or that can support collaboration across functions.
- Existing solutions came in relatively late in the game but were engineered and brought to market as heavy-duty enterprise solutions. They missed the transformation in software development and delivery that has been driven by companies like salesforce.com and SuccessFactors (now part of SAP).
- Ownership of pricing tends to be distributed, and only a solution that provides value to all of the key stakeholders (including sales) is likely to get widespread adoption.
The barriers to the adoption of pricing software are now falling:
- Pricing is maturing as a business discipline, it has more visibility, pricing managers have more general business experience, and there are more role models and success stories.
- The cost-reduction phase, which culminated with the massive outsourcing wave of the past decade, has also run its course, and there is a growing emphasis on innovation and customer value.
- The success of social software in the consumer space is making software-enabled collaboration much more acceptable, and indeed, expected in the enterprise.
- Mobile devices, especially tablets, are being rapidly adopted by the sales force (and everyone else). Sales and customers are expecting much more sophisticated sales tools. The difficult financial environment is leading people to use economic tools such as return on investment (ROI), net present value (NPV), economic value added (EVA), economic value estimation (EVE) earlier on in the sales process (or more accurately, the buying process).
- Open-source data is playing a larger role in all aspects of intelligence gathering, including competitive and market intelligence, and can be incorporated into business applications in near real-time.
TEC: What are the still outstanding hurdles to pricing software deployments and to winning the hearts and minds of users?
TG: Many executives simply do not know there is an alternative to the way pricing has always been done. We still find executives in our target market who are unaware of the competitive edge and profound value they can achieve with our software. This will take time, but it’s already changing with the marked increase in media coverage around pricing software in major publications, increased coverage from trusted sources like TEC and Gartner, and the growth of pricing practices at major system integrators like Accenture, Deloitte, IBM, L&T Infotech, and Wipro.
Implementation success rates are winning the hearts and minds of customers, and they are achieving extraordinary value with increased profits and business agility. As customers begin speaking more frequently about their successes and the business momentum pricing software provides—as you’ll see in this recent CFO Magazine feature entitled “The Price is (More) Right”—it creates greater public awareness and momentum.
SF: Software solutions have to support users in achieving their own business goals. For sales management, this means making the sales force more effective. For product development, it means helping product managers make trade-off decisions and discover new sources of value. And the software needs to ‘speak’ to people in their own language. Respecting what people know (especially sales people) and making sure that their experience is reflected in pricing is critical. This has to be explicit and not buried deep in the system.
Software also needs to be fun to use and have an appealing user interface (UI). Social applications like Facebook and mobile apps set the standard for this and people expect their working tools to be as well designed as the tools they use outside work.
There are some deep cultural issues here:
- “How far should one trust sales with information on costs?”
- “How much control should sales folks have over the range at which variables can be set in value models?”
- “What reasons should sales have for giving a discount and how should they be supported in articulating those reasons?”
The answers to these questions will vary from company to company and there is no one answer that suits all. So software will need to be easy to configure and configuration will need to evolve.
TEC: On the other hand, what recent positive trends and drivers (rationale) for pricing software adoption have you seen in the market?
TG: One tailwind behind pricing software is pricing agility, which has never been more important. Finance and business leaders want to know the prices they’re deploying are both creating profitability and protecting their customers. With the volatility in raw materials and fluctuations in global currency, coupled with the fast pace of business, there’s an absolute requirement that companies be more nimble in making pricing changes. They can no longer ignore the ponderous processes or their inability to modify prices, both of which affect profitability and customer risk.
Pricing software brings power and confidence back to sales organizations, which is a good step in the right direction. It also enables companies to leverage the rich trove of information in existing transactional data. On another positive note, we’re seeing more companies adding pricing practitioners, which is a significant breakthrough.
We conducted a study last fall to evaluate the success of our B2B customers. Our results show that our publicly traded B2B customers outperformed the S&P 500 by a whopping 130 percent. We believe it’s just a matter of time before even more leading companies adopt pricing software as a strategic growth initiative.
SF: There is a growing recognition that cost cutting can be taken too far and lead to generic (commoditized) products that struggle to recoup the investment made in them. Management teams are looking for other levers. In a constrained economy, growing the top line via higher volumes can be difficult. This leaves “the pricing lever” as the best option. Effective pricing is about a lot more than just raising prices or taking advantage of WTP. It includes identifying the market segments where one can deliver differentiated value and focusing in on them.
WTP is a powerful diagnostic tool, but by itself does not explain the variability (product options variability, quantity variability, etc.) or how to act on it. There are ways to increase WTP and to construct messages that will have the desired impact on price capture. The construction of pricing metrics that align with how one’s customer captures value is a critical part of value modeling and can help to uncover new ways to price. For example, WR Grace sells concrete additives by the bag, but the metric used to understand differentiated value to the contractor is the surface area of the floor. LeveragePoint provides tools to translate between different metrics.
The move toward “Customer Capitalism” to use Roger Martin’s term is also important and will drive adoption of new approaches to pricing—approaches that are closer aligned to how customers gain value from a solution. Innovation and customer value creation is only sustainable if the seller can capture part of the value of the innovation into price. Otherwise, they are better off providing a generic product at the lowest cost. Customers understand this, but are only willing to pay a premium if they are convinced that the differentiation is actually of value to them.
There is also a growing recognition in the business world that insight comes from generating and testing data (think A/B or split testing in marketing). All of the pricing software vendors are likely to invest in this area, with each one leveraging its own approach. Some companies will focus on better analytics on transactional data. LeveragePoint will focus on using the sales force and open-source data to understand trends in value creation and price capture.
TEC: Traditionally, avant-garde enterprises that have deployed B2B pricing management and/or optimization tools have been unwilling to talk publicly about their subsequent benefits. For one, they do want to hide their pricing capabilities from their direct competitors, while on the other hand they do not want their customers to think they are being taken advantage of in this way. Has this attitude and/or perception been changing as of late and how? Who are the champions and biggest proponents of deploying pricing solutions within enterprises?
TG: The discussion has clearly been changing. Today’s dialogue no longer revolves around pricing, but has instead shifted toward profitability and customer satisfaction. Companies are concerned about protecting and delivering shareholder value, which we hear at the corporate executive levels in organizations.
Warren Buffett’s remarks to the Financial Crisis Inquiry commission last winter were telling: “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”
We are also beginning to see more companies acknowledge their use of pricing software, as evidenced by those that have been willing to display their logos on our Web site. Many publicly traded companies now mention pricing as a strategic enabler in their earnings announcements.
The biggest champions typically include anyone with profit and loss (P&L) responsibility, as they’re under pressure to achieve financial targets. We also typically see proponents in marketing, sales, and finance. In fact, sales leaders want their sales teams to be more successful, and pricing software provides them with the confidence that they have quoted the right prices to win.
SF: As long as the focus is purely on price capture this will be seen as a zero-sum game. Companies that are good at this zero-sum game will want to keep their methods secret (and even deny that they have any methods). The only way to change this is to make pricing a win-win discipline, where the goal is to create differentiated value and then capture part of that value into prices while making sure that the buyer is also getting an advantage.
TEC: What can pricing software vendors do or what have they been doing about mitigating the “black box” nature of the solutions (that require the Ivy League PhDs to understand them)?
TG: We’ve made our software far easier to use and adopt. Any customer can look into our formulas and algorithms to see how pricing decisions are made, based on the integration of usable, consumable information. It doesn’t really take a PhD or a rocket scientist to use the software.
Here’s an example: a Lexus automobile has a number of highly complex features such as self-parking and ABS suspension, both of which are designed by brilliant scientists. The important notion is that the complexity is hidden—just as it is in our software—and Lexus makes these features easy to use for their customers. The same holds true for PROS. Our philosophy in designing software is to give users guidance, allowing them to preserve control and make decisions that enable them to win.
SF: This is not a relevant question for LeveragePoint as we have taken a different approach. These “black box” approaches work when there is a price taker (like much of the travel industry). They do not work well when price is negotiated as part of a deal.
TEC: What do you think is the next evolutionary step for B2B pricing software solutions, given their possible synergy with configure, price, quote (CPQ), contract management, demand planning and forecasting, promotions, sales and operations planning (S&OP), and other adjacent software categories?
TG: We see pricing software extending its reach to other business processes in the corporate value chain. Companies are already leveraging the granular insights that come from transactional data to make better go-to-market decisions that transcend all the way to territories and even accounts in that region.
SF: I expect to see the pricing and CPQ spaces merge in the next five years through a series of business combinations. I predict the first such deal in the next two years, maybe sooner depending on market conditions. I also expect pricing to get integrated into sales enablement tools and/or product lifecycle management (PLM).
A major vendor that tries to integrate the marketing and sales funnel and the overall purchase process is likely to appear. salesforce.com could take this on, even though it has announced it will not go into marketing automation, but I think it is more likely that a new multi-billion dollar company will emerge to own this space. In terms of innovation, I expect the following two critical and related advances:
- Semantic Web technologies will be used to make inferences on the relations between features and functions and value for specific segments.
- Competitive intelligence software will be developed that uses open-source intelligence and semantic inference to predict pricing moves (at least one of the large consultancies has a project on this underway).
TEC: Is there anything else you would like to add?
TG: We haven’t yet addressed how an IT leader could benefit from pricing software. The best chief information officers (CIOs) regularly evaluate the technology landscape to find ways to strengthen their business through technology. I would submit that CIOs should consider pricing technology as an easy win. The ROI for a $1 billion (USD) manufacturer can be as much as $20 million (USD) in hard-dollar profits. Compare that ROI with other IT investments and you’ll find few equals. Even more important, pricing software can give companies the competitive edge they need to win in their markets, as it’s both an extension of, and a contributor to, the company’s overall strategy. That’s a win for CIOs and their businesses.
SF: Probably, but let’s do that as part of a conversation after your readers have had a chance to read through this discussion, and have come up with their comments and thoughts. One question worth asking is what happens when multiple companies in a supply chain all begin to use pricing and value management software? Could this lead to a restructuring in value chains toward greater differentiation and value creation?