The medical-surgical supply unit of McKesson Corp. has few products that are more commodity-based than table paper: dispensed from rolls and replaced from patient to patient. But how to adjust the prices for those rolls from medical customer to medical customer? And in that pricing process, what tools to give sales personnel to help them "optimize" the price for better profit?
Questions like those led Britt Vitalone, McKesson Medical-Surgical's senior vice president and finance chief, to look for price-optimization software several years ago. "One of the things I recognized was that there was inconsistent pricing with various product groups" --- including the group that table paper was in. He also saw that because of the decentralized nature of medical-supply selling, the company badly needed to give sales people real-time decision-making capabilities. That required getting them "richer data" about what prices different customers -- from family practices to obstetricians to radiology specialists, in small towns and cities -- might be willing to pay.
Without the best information, "two things could happen," says Vitalone: "You could lose the sale for having the wrong price, or you could get the sale, but leave money on the table."
The need to solve costly problems like that, from the frontlines of sales and distribution, today leads more and more companies to purchase price optimization software. The market has experienced a turnaround in 2010, according to that analysts at Gartner, and now generates nearly $200 million in revenues annually for the range of providers, which include Oracle, PROS, Vendavo, Vistaar Technologies, and Zilliant.
Profitability's 'Pricing Lever'
In most cases, CFOs like Vitalone --- who uses a PROS product --- are the target purchasers of such software.
"We see CFOs as the guardians of profitability, and one of the greatest levers they have to guard it with is pricing," says Andres Reiner, CEO of PROS. Reiner sees finance as needing help in dealing with issues like wild commodity-price variations and currency fluctuation, in addition to the normal "transactional basis of how their businesses are charging." His software makes companies more agile, he says, by providing real-time information about "product attributes, customer attributes, and transactional attributes" --- including information about how much the buyer may be willing to pay for various products.
Vitalone says his own unit's small pricing group -- put together after he became CFO nearly three years ago -- started by "stepping back and cleansing our data, which alone can be pretty muddy and unkempt." He found prices "all over the board for similar SKUs, and the question that jumped out at us was why, since there seemed to be no rhyme or reason to it?"
Sign up for CIO Asia eNewsletters.