Forbes: Why CEOs Need To Pay More Attention To Their Pricing

February 28, 2014-

By Roger Trapp

Next week the French resort of Cannes will play host to sales and marketing executives from all over Europe and beyond. It is probably fair to say that the appropriately confidently styled “Outperform Europe 2014” event will be a livelier affair than if it were aimed at finance teams. At the same time, though, it is clear that the promenades and cafes of the Mediterranean city famed for its annual film festival are unlikely to be peopled by the likes of the characters from Death of a Salesman, Glengarry Glen Ross or other fictional works inspired by individuals who always have an eye for a deal. For this event, backed by the data analysis company PROS, is much more about using big data to understand buying, selling and pricing patterns than it is about the art of closing.

Big data has, of course, played a significant role in business for some time now. For example, supermarkets use information gained via their customers’ loyalty cards to stock their stores appropriately, while the advent of personal computers and increasingly sophisticated software programmes means that today’s managers have at their fingertips detailed information that their predecessors would never have been able to glean. This weight of information can itself be a problem, of course. But that is something for another discussion. What is significant is that – despite the eager take-up of big data and analytics – one crucial area of business, namely the price at which a good or service is sold, has to a large extent remained immune. This is particularly true in Europe. Pol Vanaerde, director of the European Pricing Platform, which helps develop and share knowledge of pricing around the continent, says that so many companies are in the early stages of “pricing maturity” that there are plenty of opportunities for companies to optimize revenue streams.

The tough economic environment is also contributing to the continuing interest in the area, of course. Hitherto, the intense competition has created a focus on price cutting. But, popular is it is, discounting is not generally very scientific. Looking at the issue in the more strategic way recommended by Vanaerde, executives at PROS and others can prove much more beneficial. “It’s more about price optimization leading to margin improvement,” says Vanaerde, who with his consultant hat on, adds that such projects are easy to sell to top management on account of the clear business case – the possibility of significant improvements in margins.

Taking this more complex approach requires leadership, however. Pricing has traditionally been the concern of sales and marketing teams. But as it is becoming more sophisticated it is increasingly being driven by finance and its importance to strategy requires that chief executives take a close interest, too. In particular, they need to realise that changing a company’s approach to pricing – so that it focuses on customers that make it money, for example – typically requires cultural and hence structural change. “The important message for chief executives and managing directors is this is a long-term investment,” adds Vanaerde.

A similar point is made by PROS. Its “definitive guide for better pricing” says that the goal is not achieved immediately but will be eventually if a consistent approach is adopted. It recommends businesses start by focusing on four key areas.

2. Segment accounts. This enables the business to spend time on those that are potentially more profitable rather than focusing on the largest ones, which can be less profitable than is thought.

3. Maintain the customer base with technology.By being able to analyze sales companies will not have to resort to increasing the size of sales teams or increase training in an effort to increase sales.

4. Track progress and identify areas that still need improvement.This involves having the greater knowledge and insights offered by technology.

As Andres Reiner, chief executive of PROS, says, this new approach to pricing is all about using data rather than “gut feel”. But he insists: “Gut feel will never go away. This is just complementing it.” The real value, he suggests, is the greater confidence the data gives to those charged with deciding on price. “We’re not replacing experience. We’re just helping improve decisions,” he says. At a time like this that could be the difference between success and failure.