For a long time now, the practice of product pricing has involved more art than science, with product managers and sales professionals governed mostly by what "felt right." In recent years, however, science has started to gain the upper hand, and the sun may be setting on the era of "pricing by the gut."
In manufacturers' never-ending quest to turn over every stone that may yield better profits and allay the pressures of a bustling global marketplace, the list of strategies is long and growing: business-spanning ERP systems, lean manufacturing, collaborative networks that tie in partners across the supply chain, and outsourced labor, to name a few. An item that only recently made the list is one that seems the most obvious, at least in retrospect: pricing science.
Few variables have a more direct impact on a company's profit than the price at which it sells its products. Traditionally, executives and sales managers viewed the pricing for their products as something of a free-for-all. Since pricing depended on so many unpredictable moving parts, it was best left in the hands of the sales team — the folks with the best read on the prospective customer.
And yet, variables that may be too numerous and complex for the average person to process and analyze are a cinch for today's computer processors, working in conjunction with the right software-based algorithms. And so with the dawn of the new millennium came the dawn of a new niche in enterprise applications — pricing management.
With few exceptions, today's crop of pricing software providers began operations within a year or two of the turn of the century. Many have their roots in California's Silicon Valley, where entrepreneurs steeped in supply chain and customer interaction applications saw a new opportunity to apply advanced analytics to product pricing.
The fraternity includes Metreo, which was founded in 2000 and merged with Symphony in 2007; Model N, which began in 1999 and focuses more broadly on revenue management; pVelocity, a Canadian company founded 2001; Vendavo, founded in 2000; Vistaar, which began operations in 2001; and Zilliant, founded in 1999. SignalDemand, an upstart among upstarts, emerged from Silicon Valley in 2004 with an on-demand software model that has earned it a solid base of customers. The wily veteran of the market is PROS, which traces its roots to 1985 and operates out of global headquarters in Houston.
The larger enterprise software vendors have taken notice of this growing area of interest. SAP in 2005 tapped into its vast partner ecosystem to resell software from one of the market leaders, offering SAP Price and Margin Management by Vendavo.
SAP's main rival, Oracle, is navigating a tried-and-true acquisition path, having bought pricing specialist Revenue Technologies in 2007.
"Oracle's strategy is to deliver by 2009 modules under the price management brand that address price analytics, price optimization, and price execution functions for E-Business Suite and Siebel," wrote Gartner analyst Michael Dunne in a recent research note.
The Price of Better Pricing