When Does An Automated Pricing System Become A Risk 👾
We previously examined the issue of misleading pricing in eCommerce, which raised concerns about pricing regulations in the digital realm. Now, a new controversy has sparked as a group of lawyers filed a lawsuit against various Las Vegas strip hotels for using an automated pricing system to maximise their profits. This opens the door to a whole new discourse about how businesses should integrate software into their operations.
The problem is though, this recent news story highlights that there is still a significant gap to be filled for pricing managers and vendors of software alike when it comes to automated pricing systems. What’s more, it suggests serious price systems integration issues; and that both teams and vendors are still grappling with how software and other technologies stand with and fit in with the organisation. Some still presume, for example, that after installing and configuring pricing software, the pricing team rarely intervenes with the system. The truth is, though, pricing software and pricing system integration and automation necessitate a high level of analysis and intervention from the pricing team to ensure the system is running correctly.
When you buy a new pricing system, you’ve got to be sure your pricing team knows what they are doing.
In this article, we will continue to discuss how businesses that plan to or have already integrated an automated pricing system can use it effectively and in accordance with laws and regulations. We argue that even as third-party vendors provide pricing data and software, it is critical for the company to maintain complete oversight and accountability over its pricing software.
At Taylor Wells, we believe that human talent, skills, and expertise, supplemented with the speed and precision of an automated pricing system, can deliver the best operational efficiency. By the end, you will understand how to get the most out of your pricing software while avoiding any risk of jeopardising your brand’s reputation.
How Does An Automated Revenue And Pricing Software System Affect A Business
As the market becomes more complex, so does the pricing. As a consequence, pricing software is becoming more widely used, whether by small, medium, or large businesses.
What is an automated pricing system?
An automated pricing system or software solution is one of the methods of price setting which automates prices in order to help businesses become more efficient. It features versatile capabilities that allow sales teams to set prices, discounts, and rebates that are specific to each customer segment. Pricing software technologies address four distinct functionalities. The first is concerned with pricing analysis, while the others are concerned with price optimisation, management, and execution. Prisync, Price2Spy, Omnia Retail, PROS Smart Price Optimization and Management, and Quoter are some of the most popular pricing software.
What are the advantages of using an automated pricing system?
1. Businesses can build efficiencies, lower costs and generate revenue and profit faster. Thus, pricing software can significantly impact a company’s scalability. According to some studies, the benefits of using pricing software can range from 1% to 3% of gross margin dollar growth.
2. Pricing software can simplify and speed up quoting to customers. In a fast-paced market, customers will not likely to wait for quotes. Hence, businesses can differentiate themselves from rivals and make the best first impression by providing quotes at lightning-fast speeds.
3. Software algorithms offer dynamic retail pricing in margin-constrained industries. Markets are becoming more and more competitive. Products and services must now mirror the complexities of their marketplaces through flexible but targeted prices. Pricing software can enable this in ways that manual procedures can’t.
4. Using the right price software can add structure and consistency to price setting and price changes. Customers are always aware of price discrepancies, especially when they are huge. This, of course, harms your brand’s reputation because customers begin to question the value you offer. Pricing software can spot misaligned prices or inconsistencies quickly and fix them before a product gets into the market
What are the disadvantages of using an automated pricing system?
1. Teams skills and capability gaps. It is challenging to bring new technologies into business operations for the first time. Your employees aren’t accustomed to it. When proper briefing and training are not provided, there is a risk of low acceptance, particularly among the sales team. When this occurs, they will be unable to justify the price suggestions made by the software and will revert to their traditional methods.
2. An over-dependency on the automated pricing system. Some managers forget that human expertise is needed to get the most out of technology. Data-driven pricing does not imply that software alone can make the best pricing decisions. Relying solely on them reduces pricing capability.
3. Automation failure and programming errors. Failure of the programming system can occur for a variety of reasons, such as hard drive malfunction. The most common outcome is the loss of all or some of your data. This only subverts the supposed benefit of software in saving time.
4. Difficult for the regulator to track prices. While pricing software is well-known for its accuracy and dependability, it is not automatically programmed to think like a human who must abide by the law. The software does not always generate recommendations that are in accordance with pricing regulations. This creates risks for any company that utilises it. Let’s go over this in more detail.
Discussion On The Risk Of Automated Pricing System Strategies
Of all the disadvantages of the pricing software we have mentioned above, the last one is important. let’s revisit the real case study of the hotel chains in the United States to explore further.
A significant number of Las Vegas Strip hotels have been accused of inappropriately maximising their profits recently. Lawyers are saying that hotel operators in this area have been using revenue management software that displaces competitive data in order to increase the price of rooms for the purpose of boosting their profits without re-balancing supply and demand i.e., adjusting occupancy rates up and supply of rooms down.
What lesson can businesses learn from this? While third-party vendors often provide pricing data and software to set prices for business customers, it is vital for the business to maintain full control and accountability over its pricing software.
When we talk about accountability, we are referring to the following:
- How vendors are programming their pricing software – e.g., methods & approaches;
- What data and inputs do vendors use or choose not to use; and
- The assumptions vendors make to build their pricing logic and any underlying biases that may be harmful to the business and its customers.
What should businesses keep in mind when using pricing software?
1. Never assume revenue management vendors are running algorithms in line with regulations. The primary goal of software developers and sellers is to create programmes and solutions that are adaptable to as many businesses as possible. This contributes to their demand and appeal. It is not their priority to develop solutions that automatically consider the pricing regulations. Only company executives can do this by deciding whether to accept, reject, or modify pricing suggestions generated by the software.
2. Keep an eye on the type of data your software revenue management vendor feeds into your pricing model. Only credible data allows for sound decision-making and prices that are certainly in conformance with rules and regulations. In fact, it all starts with data. It is the basis on which pricing software generates its guidance. Make certain that you are not feeding unnecessary and harmful information to your software.
3. Understand how vendors have constructed the algorithms of the automated pricing system. This does not require you to be an IT or programming expert. Simply understand the logic behind how developers programmed the software. What criteria does it use to determine prices? When you understand this, you will be able to determine whether the software is appropriate for you. You may even be permitted to negotiate and have the developers modify the pre-set algorithms to your preference.
Implications Of An Automated Pricing System Management Process
Businesses must remember when acquiring pricing and revenue software that algorithms should be designed in accordance with the pricing laws and regulations. The price model and price algorithm generated must be reliable, logical, legal and fit for purpose. Otherwise, it’s not only useless. Instead of convenience and potential profit gain, you can be liable for inappropriate pricing procedures. Before embedding an automated pricing system into your operations, we advise that you do two things first.
1. Boost your commercial capability.
When you have a strong commercial capability, there is a higher chance that your organisation can handle the transition to pricing software. Our findings show that when a business builds and embeds commercial capability across the business; bolstering its internal pricing skills and capabilities to build a sustainable pricing system, it can generate at least 3-10% additional margin each year while protecting hard-earned revenue and volume. This is at least a 30-60% profit improvement straight to the bottom line.
2. Employ a dedicated pricing team.
Our findings show that with the right set-up and pricing team in place, incremental earnings gains can begin to occur in less than 12 weeks. After 6 months, the team can capture at least 1.0-3.25% more margin using better price management processes. After 9-12 months, businesses often generate between 7-11% additional margin each year as they identify more complex and previously unrealised opportunities, efficiencies, and risks.
Some analysts predict that pricing software will become smarter, have more capabilities, and have fewer drawbacks as technology advances. Whether you are considering using an automated pricing system for the first time or have been using one for some time to improve your sales and revenue, don’t forget to upskill your pricing team and build capabilities to standardise prices that are in line with laws and regulations. Training, supervision and ongoing capability building in strategic pricing, policy and regulations will prevent damaging your brand’s reputation and accusations of using inappropriate pricing. Learn about lawful and strategic pricing methods and work with solution providers to find the best software for your business.
For a comprehensive view of building a great pricing team to prevent loss in revenue, Download a complimentary whitepaper on How to Avoid Pricing Chaos.
Are you a business in need of help aligning your pricing strategy, people and operations to deliver an immediate impact on profit?
If so, please call (+61) 2 9000 1115.
You can also email us at email@example.com if you have any further questions.
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