Pricing tools software: are IT tools a silver bullet for B2B pricing?
Pricing tools software: Pricing IT tools might not be the silver bullet for B2B businesses.
I have had significant experience using varied pricing tools software products of varying strengths and weaknesses for various pricing approaches. Being simplistic – they often create just as many problems as they solve.
Whilst a Commercial or Strategic Pricing Manager’s role sits between finance, sales, marketing and strategy, most pricing software products utilised inside companies have been administered and viewed as some form of accounting package. They have been argued for and installed often by people with a cost-plus mentality and tend to reinforce the same (with all the negatives and positives that the mindset brings to a corporation).
Table of contents:
Pricing tools software – how to evaluate efficacy
We like to believe that a problem has been resolved because we have a seemingly efficient and Avant-garde technological product in place to solve it. When considering the efficacy of these products, it is vital to differentiate three broad concepts of Pricing and Commercial Management:
1. Pricing controls and policing
In general, pricing controls and policing is the easier area to address. Stopping your sales team from selling at a loss or issuing prices without any structure or control.
A well-maintained pricing software programme can help with ‘pricing controls and policing’ but it does not help with either implementing a price rise to customers or educating your teams on value, pricing and selling.
If a business does not have the right level of commercial knowledge about pricing competency, insight into why customer value your business and the ability to implement a price rise, then the numbers entered into even the most sophisticated pricing tools software are harmful nonsense. Eventually, the business will find that EBIT is suffering, as customers demand credits and unreasonable discount and or switch to competitors. Sales and commercial teams will get de-motivated and low in energy because of the daily backlash from customers. Adversarial negotiations with procurement will be the norm, not the exception.
2. Strategic pricing & selling
The second area which is strategic pricing is more intangible (in theory if not in revenue delivered). The strength of the first issue (policing) can actually have a detrimental impact on the second. We lose sight of the end goal, like strategic pricing by focusing purely on policing and controls. This is the classic instance of “not seeing the forest for the tree”.
3. People, pricing capability and skills
The third one is the harder area to address because new ideas, visions and breaking old habits takes a while to manifest into new, positive and productive behaviours. Especially if there is no climate for change or pre-existing value-based pricing culture in the business.
THE BOTTOM LINE
Pricing tools software has a significant potential to maximize profits if used properly. Bear in mind that it cannot solve all pricing problems. Furthermore, it is not a substitute for a good pricing strategy. To proactively steer pricing, consider having the right organization, support processes, and methods in place.
Pricing software tools: Is technology creating gaps in team capability?
Pricing software tools: As margin forces continue to impact the value chain at full force and a whole host of new and complex commercial challenges emerge across B2B and B2C business environments, pricing approaches are changing rapidly and significantly. You need every member of your pricing team to be effective, functional, agile and adaptable in order to acclimatise and upskill to a new commercial reality that has slowly dawned upon us.
At the same time, recruitment & sourcing, team management & leadership, engagement & motivation, talent management & retention are all getting tougher and more difficult to predict. In-house recruitment teams are not controlling costs as hoped. Also, leaders of businesses with established pricing teams are looking for help to adapt to the changing market conditions. That includes optimising their pricing function for better results.
Why is this happening?
As the take up of new IT pricing software tools exponentially escalates, organisations across many industries in Australia are in danger of putting all their eggs in one or two well-known branded pricing software tools without fully appreciating the need for high calibre people to run and make money out of these very expensive pricing systems.
Don’t fall into the same trap.
The science behind well-established pricing software tools is sound. However, despite the highly impressive algorithms, and multiple lines of linear regressions and weighted competitor scores, all IT systems (even the well-known branded ones that start with P and V) run off whatever structures and data you feed into it.
In other words, if you put junk in a pricing system, no matter how much you pay for it, you will still get junk coming out of the system. And, even though it comes out quickly and in a seemingly logical format, it will not give you a better and more accurate read on your customer base or competitors. Further, it will not deliver you the EBIT outcomes and cost reductions you are looking for.
The problem with IT pricing software tools (whatever branded system you choose)
IT pricing systems do not tell you how to structure your price and value architecture. They do not provide you with a strategy or real pricing capability. They do not clean your data or provide data governance guidelines. In addition, they do not tell you which opportunity is good or risky. Also, they do not even alert you to good opportunities or risk. All of these critical pricing actions and decisions are heavily dependent on human pricing expertise, implementation to market, high functioning teams and intra and inter-team communication protocols and feedback loops.
In essence, whether your pricing is profitability or not depends heavily on your pricing strategy and price architecture. IT pricing software tools do not generate the right strategy and price architecture for the business. They do not tell you about customer purchase behaviour and value drivers unless you have pre-programmed it to do that. They do not tell you whether your price structures have logical relativities, differentials and bandwidths. This is still reliant on a human’s domain expertise, price analysis, human intervention and care – and inevitably regular market and customer testing.
What are IT pricing software tools very good at doing?
IT pricing system automate pre-programme pricing methods or business ‘rules’ very well. So once you have a good structure in place (and it’s been thoroughly tested in the market), it makes sense to utilise a sophisticated pricing system to automate these tested rules and methods. You can also enter as many rules as you like to the system, as long, of course, as you know how to configure the system correctly (which again requires a lot of expertise and training).
Caution: Never automate untested rules. (Sounds obvious, but many companies do this because they do not have a pricing leader and or pricing team with the skills to test, validate and or flag underperforming pricing methods in the market. A team and or pricing professional with the ability to convert the total value of the business’ assets into EBIT is still a rare find.)
What can you do about it?
It’s becoming increasingly important for businesses to design and invest in pricing talent that drive pricing transformation. Shortages in people with critical pricing strategy, structures and people skills will see relatively few pricing executives commanding rising salaries.
It is also very likely that wage inflation will increase in certain pricing skills areas. Namely systems operations and analytics, big data and price structure development. But, as more global talent comes into Australia, it is also likely that many businesses will be reviewing and correcting wages and compensation packages (i.e., driving average wages down). Perhaps too late, as many Australian companies are locked into traditional salaries, payment and compensation structures well above market rates for skills and competencies that can be automated or outsourced.
In short, organisations need to take a different approach to matching current pricing capability with a strategic business plan. You need to develop new pricing competency models. Then, take the brave step, and actually assess the current team’s capability against future capability requirements.
Delaying pressing workforce issues in pricing will facilitate a capability crisis across many industries. (Not too dissimilar to what happened in mining i.e., when organisations found themselves paying the price for layers upon layers of unnecessary management structures, and out-of-date skills that quickly became redundant with the collapse of the mining boom).
What the future looks like?
The next 10 years, will not be about quantity of pricing hires, it will be about quality – leading directly to pricing capability. You need to find the right people to implement pricing transformation and achieve organisational outcomes. You, then need to determine whether these are the right people to drive the chosen business strategy. Also, whether you need to re-look and revise your talent management strategy again.
We advise businesses to take a lean and agile approach to workforce planning and resourcing. Test and trial different team structures and talent strategies. Evaluate pricing capability using sophisticated and domain-specific people analytics and price frameworks. Implement innovation recruitment strategies to attract the right people for the job. And, then continually monitor and align your pricing function to strategy.
Change is not easy and neither is aligning people to a new pricing system. Let’s stop downplaying fundamentally critical areas in pricing transformation and make a decision to address key people objectives today. See blog on competitive based pricing.