User Recommendations for Pricing Management
Written By: Predrag Jakovljevic
Published On: May 2006
What SAP Gets via Partnerships
As explained in Applications Giants Bolster Their Pricing Management Capabilities in retail, pricing and profit optimization are analytic applications that analyze demand patterns and optimize pricing by each stock-keeping unit (SKU) by selling location in order to optimize revenue and gross margins. In a bid to meet the growing demands of the price management market, SAP has entered another partnership, this time with Vendavo. The benefits SAP will gain from this partnership are similar to those previously held by SAP—which have often resulted SAP acquiring its partner. Past partnerships-turned-acquisition have included TopTier and TopManage for a portal and small business applications, respectively (see SAP Acquires TopTier to Further Broaden Its Horizons); A2i for product content management (PCM) and master data management (MDM) capabilities, see SAP Bolsters NetWeaver's MDM Capabilities; Part Four: SAP and A2i); and Lighthammer to deliver enhanced connectivity between the plant floor and the enterprise (see Has SAP Nailed the Plant Level Leadership with Lighthammer?).
Part Three of the Applications Giants Bolster Their Pricing Management Capabilities series.
Vendavo has long been a strategic marketing and development partner of SAP. It has an industry-centric pricing product, which is delivered as an SAP xApp-like composite application. Consequently, the SAP and Vendavo product roadmaps are jointly developed and synchronized, and both vendors are collaborating with customers to avoid duplicating effort and overlapping functionality, and to provide more seamless integration.
Through this partnership, SAP immediately gains workflow-based price execution capabilities, and both vendors have plans to jointly expand into price optimization. In addition to remedying the performance and scalability of embedded Vendavo solutions (currently, the 32-bit Vendavo product architecture limits the historical data size that customers can import to evaluate the transactions' profit) there are other improvements reportedly in the works. For example, the ability to handle multiple pricing waterfall definitions for different business units, in a single instance of product, is also being improved.
Furthermore, a high percentage of Vendavo clients are also SAP clients, which should help SAP manage their expectations. Additionally, the improved price execution functionality should make SAP more competitive in non-SAP environments too. SAP has a solid native price execution functionality for administering prices once they are determined, but has no optimization functionality and only limited enforcement capabilities.
For an extensive discussion of the issue of pricing management see The Case for Pricing Management and The Rise of Price Management.
Also see The Retail Battleground for Pricing Management for further discussion of the justification for pursuing the acquisition strategy.
This is Part three of a three-part note.
SAP Responds to Customers Demand
Although the price enforcement functionality is largely based on analytics and workflow, which are both provided by the SAP NetWeaver stack, developing the pricing know-how seemed apparently daunting even to the mighty SAP. Reseller deals are unusual for SAP, which usually prefers to develop its intellectual property in-house. The only similar deal that comes to mind would be the agreement with Virsa for the US Sarbanes-Oxley Act compliant software (see Joining the Sarbanes-Oxley Bandwagon; Meeting the Needs of Small and Medium Businesses). It might be interesting to note that SAP has just recently acquired Virsa.
SAP has repeatedly stated that when its customers ask it to incorporate new functionality into its product suite, the vendor will consider making partnerships or acquisitions to meet these needs. Although that approach might sometimes conflict with its strategy to attract a vast independent software vendor (ISV) development community within the NetWeaver environment, it is nonetheless quite clear that SAP is dedicating a significant amount of resources to the NetWeaver concept, since what drives SAP is the desire to sell NetWeaver licenses, and its portal and integration technology.
But, the competition is not going to sit still and wait for Vendavo and SAP to deliver their algorithmic price optimization capabilities, especially for specialty chemicals customers whose needs are growing in this area. There are many competitors out there, but only some have broader price management solutions that do not require harrowing customizations and claim to have credible customers in the chemical industry. Of these are PROS Pricing Solutions, pVelocity, Metreo, and Zilliant.
Ultimately, this move into pricing management is good news for the respective customers of Vendavo, Khimetrics, ProfitLogic, SAP, and Oracle, particularly those that seek to improve their pricing processes and exchange relevant information with business partners that are not necessarily SAP or Oracle shops. These announcements may also come in handy for SAP and Oracle customers looking for a pricing solution, and it should generate increased confidence about vendor viability for many Vendavo, Khimetrics,or ProfitLogic customers. They should immediately explore how the tight integration into the application stack via SAP NetWeaver or Oracle Fusion Middleware might benefit them. SAP and Oracle should take the acquired products' integration relatively judiciously, while being careful to preserve and build on the formerly independent products' successes in order to allow the right balance of autonomy and embedding to evolve.
SAP and Oracle users evaluating price management solutions, especially if they are comfortable with NetWeaver and Fusion and are in process or retail industries, should seriously consider the added products. Nevertheless Khimetrics and ProfitLogic customers or prospects with no SAP or Oracle products, or those that do not plan to engage these vendors should not automatically rule out Khimetrics and ProfitLogic. Since their functionality will become SAP- or Oracle-centric down the track, customers or prospects should also consider other pricing providers, some of which are also SAP partners like DemandTec. Retailers should contractually compel the acquiring vendors to support these pricing products as separate applications for the foreseeable future, and achieve favorable deals if they want to implement other SAP or Oracle products.
In other industries, users should evaluate different options, keeping in mind the vertical industry's savvy and fit, along with the vendors' commitment to industry and technology standards. If vendors claim to focus on a certain industry, prospective customers should add them to their long list and look at them first. Users should ask these vendors why they feel they can do a better job, and should look for the vendors' understanding of the industry's revenue, its cost and profit drivers, and the product features that take will take these factors into consideration. Asking for industry-specific references goes without saying. If vendors do not exist for a particular vertical, or if an adequate reason is given for not using a vertical vendor, then a horizontal or cross-industry pricing vendor might be appropriate. Also, expertise of the professional services team delivers more vertical distinction than the software itself, but with a sizable price tag.
In general, almost every company can benefit from a pricing solution and improved pricing practices, and should approach the management of selling prices and increases with the same rigor they use to curb upstream supply chain and manufacturing costs. On its own, price management might improve revenue (by a few percent) and gross margin (even by an umpteen percent), but the truly amazing benefits will only come when price management is integrated with the appropriate cost information and demand management system. Companies that can shape demand through price changes should focus on a combination of price optimization and price enforcement, whereas the other companies might want to start with price enforcement first. Thus, avant-garde companies are turning their focus toward price management, while their direct competitors are feeling the pressure to embark on their own pricing management deployments. A litmus test to gauge whether the solution is needed is to ascertain how long it takes to process a special pricing request. This will determine how convoluted the pricing approval workflow is. How long salespeople spend looking up, inquiring about, and communicating prices should also be determined.
As price management is still an emerging and highly fragmented space, selecting vendors based on their viability is not possible, because the space will consolidated. Thus, seeking appetizing projects with a proven payback and proof of concept are advised. It is also advisable to seek an on-demand deployment, where possible. Since price execution functionality, such as price list management, discount management, price configuration, etc. is delivered through enterprise resource planning (ERP) functions and data, it is essential that the selected price management product can be easily integrated with tools like MDM, to achieve immaculate order-to-cash execution processes.
In reality, not all businesses are ready to benefit from profit/pricing optimization, but all these products and services are driven by information that comes from the users' existing systems or can economically be generated. Pricing/profit optimization is not magic. It starts with information and if users do not have the right information, they will not get the right result. Typically a few years of data history is needed to "prime" the system (meaning lots of data capturing, quality testing, and interaction with the vendor), but, some companies will still make errors about data they do not have, which brings us back to the need to balance pricing with demand management and consumer research to gauge, for example, whether the consumers feel the last price hike was justified.
About the Authors
Predrag Jakovljevic is a principal analyst with TechnologyEvaluation.com (TEC), with a focus on the enterprise applications market. He has nearly twenty years of manufacturing industry experience, including several years as a power user of IT/ERP, as well as being a consultant/implementer and market analyst. He holds a bachelor's degree in mechanical engineering from the University of Belgrade, Yugoslavia, and he has also been certified in production and inventory management (CPIM) and in integrated resources management (CIRM) by APICS.
Olin Thompson is a principal of Process ERP Partners. He has over twenty-five years experience as an executive in the software industry. Thompson has been called "the Father of Process ERP." He is a frequent author and an award-winning speaker on topics of gaining value from ERP, SCP, e-commerce and the impact of technology on industry. He can be reached at Olin@ProcessERP.com.