Applications Giants Bolster Their Pricing Management Capabilities

Event Summary

Almost all companies need to manage selling prices and potential price increases with the same firmness used to manage manufacturing and procurement costs. Traditional enterprise applications providers, having lacked the pertinent native capabilities and intellectual property to aid in this domain, are now moving to oblige their customers in various industries. For an extensive discussion of the issue of pricing management see The Case for Pricing Management and The Rise of Price Management.

Thus it is a small wonder that, despite the many acquisitions and the impending consolidation of the market, there is still a plethora of vendors that handle only pieces of the price management puzzle and have expertise in a certain set of industries and niches. For instance, large enterprise applications providers might have pricing tools that use business rules for different discounts for client classes, but these tools' cumbersome pricing lists and information require significant manipulation and effort to turn them into viable sell-side strategies.

Conversely, some specialist pricing vendors focus on capabilities like price visibility, and provide a dashboard to show how well or poorly current pricing is doing, while others do price optimization and planning, or offer methods for setting a better price.

The following is a list of several pure-play vendors (some which have recently been acquired) that have carved out certain niches in the pricing space.

These pricing management brand names have recognizable clients, though not all are willing to publicly vouch for their providers. Namely, when user companies find some pricing success they are reluctant to talk about it, largely in an effort to preserve their "best kept secret". However, when projects fail or underachieve, much grumbling and demand for concessions are heard.

This is Part One of a three-part note.

What are SAP and Oracle Doing?

Marshaling the most complete retail industry systems is one of the latest battlegrounds between Oracle and SAP. Early in 2005, after some tug-of-war, Oracle outbid SAP for Retek, a specialist vendor of retail merchandizing management software. Then in mid 2005, Oracle added to its retail functionality by acquiring ProfitLogic, a niche vendor of merchandize pricing and profit optimization software with strength in specialty goods and apparel markdowns. Then in early 2006, Oracle acquired 360Commerce, a premier provider of store and workforce management solutions (most likely to counteract SAP's Triversity move) and TempoSoft for its retail workforce optimization capabilities.

For more information on the scope of retail management systems, see Retail Systems: A Primer and Retail Market Dynamics for Software Vendors.

As detailed in The Case for Pricing Management, pricing is a complex process, and this is particularly true in retail. In this sector, a thorough understanding of the numerous interdependent variables that drive demand, such as seasonality, price elasticity, cross-elasticity between items, and inventory presentation, are critical to making profitable pricing decisions. To that end, Oracle Retail Price Optimization (whose functionality largely comes from former ProfitLogic) provides merchants and price analysts with customer demand insight and optimization. These functionalities enhance the pricing process by enabling retailers to provide the right products at the right prices, to promote products to drive sales, and clear them profitably, while providing more space for fresh, full-price merchandise.

Some targeted capabilities that should allow users to sharpen their pricing policies and drive higher profits include the ability to

• Determine key items based on true customer market-basket drivers;
• Consider key demand drivers such as price elasticity, seasonality, cross-elasticity, and targeted price elasticity models at the item and store level;
• Predict "drag along" revenue and margin for each key item at the store level;
• Recommend the exact minimum relative price gap need to compete effectively for each store or key-item;
• Predict the whole-store revenue and margin impact of a key item price change;
• Provide what-if decision support to simulation options prior to executing the strategy; and
• Assess the impact of competitive price changes.

However, recent moves by SAP might jumpstart a more comprehensive and pervasive adoption of price management solutions (in several industries), which is particularly relevant given that price management solutions certainly needs a major boost marketing awareness and product development investment. Last November, Vendavo and SAP announced that SAP will offer a more comprehensive solution for price and margin management by reselling Vendavo's price management software suite to its customers within manufacturing industries, such as chemicals, high tech, and oil and gas. The new solution, which is "Powered by SAP NetWeaver" certified, will complement and enhance the price execution capabilities of mySAP ERP and mySAP Customer Relationship Management (mySAP CRM) with real-time, sophisticated pricing analytics, a framework for price setting and policy management. Also, there will be interactive negotiation capabilities to recommend, negotiate, and evaluate prices and terms on sales agreements. Sold under the name SAP Price and Margin Management (SAP PMM) by Vendavo, the solution is generally available. SAP is initially targeting the chemicals, high tech, and oil and gas industries, but it anticipates addressing a much broader set of industries in future release cycles.

Vendavo and SAP's strong partnership is supported by a growing number of Fortune 500 customers that are willing to talk about their experiences, thereby giving the vendor and the pricing execution concept a much needed "shot in the arm" which will help strengthen this market. Vendavo currently claims about twenty customers, where about two thirds' of these are common customers with SAP, such as Hexion Specialty Chemicals, BP Petrochemicals, Georgia-Pacific Co., and Eastman Chemical Co. Some other publicly named chemical customers include Borden Chemical, Honeywell Specialty Materials, Chemtura Corporation, and NOVA Chemicals. Many of these have reportedly increased their net margins significantly by solving a broad range of pricing challenges that include managing strategic pricing initiatives, such as creating and executing custom pricing based on a specific customer' purchase history or strategic importance. They have also been able set list prices, manage price lists, control margin leakage, negotiate and manage contracts, price quotes, track pricing performance and customer compliance, and communicate prices across the organization.

To that end, Vendavo solutions have to integrate well with other mission-critical, customer-facing processes and applications. The vendor has thus worked with SAP for more than three years and it takes great pride in the seamless integration of its solutions and in the strength of its Powered by SAP NetWeaver certification and partnership (which currently means that Vendavo uses SAP's Web Application Server, BI, Enterprise Portal and Exchange Infrastructure [XI] components of SAP NetWeaver). But now, customers will be able to license a comprehensive, fully-integrated price and margin management software solution from a single source—SAP.

On the other hand, SAP cites that the relationship with Vendavo is a prime example of how the "gentle" giant meets specific customer needs by leveraging the independent software vendor (ISV) partner ecosystem, called SAP's Industry Value Network (IVN) to complement and extend SAP solution offerings by filling the "white space and red space" in its industry product roadmaps. It might be interesting to note that it was the SAP Chemicals Industry Business Unit (IBU) that has also long sensed the rising demand for adaptive manufacturing (plant-level visibility). As a result, it struck a partnership with Lighthammer that subsequently resulted in its acquisition and the delivery of SAP xApp for Manufacturing Integration and Intelligence (SAP xMII). For more information, see Has SAP Nailed The Plant Level Leadership With Lighthammer?

What Vendavo Contributes

At this stage, Vendavo can certainly help with graphical and interactive price execution and enforcement capabilities. It bases the SAP PMM approach on three core elements—insight, guidance, and empowerment. Insight, or the Vendavo Profit Analyzer module provides "on-the-fly" pricing analytics for business decision makers, so that they can understand every component that drives pricing performance. The module features capabilities, like price waterfalls; price and margin bands; scatter plots; comparisons; indexing; time series and trending; statistical analyses and regressions; performance driver analyses; etc.

To illustrate, the product breaks prices into its most important factors. Along with the price of the product, it also includes shipping and payment terms, delivery time, customized engineering, etc. When a salesperson fills a template with the terms of a specific deal, he or she is able to see some flagged anomalies, for example, such as that free shipping is only applicable for orders worth more than $10,000. On the other hand, managers are able to set up workflow-based resolutions (approvals) of these situations to stop profit leakages.

Guidance, or the Vendavo Price Manager module, provides price setting and policy guidance to drive more profitable decision-making, with the aim of consistent direction and the proper amount of control of prices and policies across the entire business—including business units, product lines, market segments, geographies, channels, etc. While the goal is to maximize the price, enterprises have to first focus on having a clearer rationale why each price element is set in certain way. Equality becomes the focus, and any outliers are eliminated. To that end, the module can manage multiple price lists, set analysis-driven prices and policies, perform mass price updates, maintain pricing policies, export prices to ERP systems, create Microsoft Excel-based price books, route price and policy change requests, etc. Another important factor is that SAP PMM can handle mass price updates to SAP. Consequently, many customers have reportedly gotten significant payback from improving billing accuracy.

Last but not least, Empowerment, or the Vendavo Deal Manager module provides price negotiation capabilities to make every transaction more profitable in every aspects of the deal, such as price, volume, terms of sale, etc. The product can compare multiple pricing scenarios, analyze these against benchmarks and peer groups, and develop win-win proposals with tradeoffs and suggestions. It can also track contractual commitments and purchase deliveries, leverage competitive win/loss information, and get context-specific target and floor prices. Additionally it can manage configuration- and formula-based pricing, and route proposals via relevant workflow approvals. All these modules can also handle multiple currencies and units of measure (UOMs).

This concludes Part One of a three-part note.

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. Thomspon 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.