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Pricing pains? More CFOs turn to software for better profits

Roy Harris | Oct. 14, 2011
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?

Putting information in the hands of sales people "is something you almost have to do in a business like distribution, where the number of transactions is so great," he says. "To think about how many people you'd need in a centralized location for that work, the economies of scale just aren't there."

'It's All the Same Product'

When it comes to table paper, for example, "it's all the same product," Vitalone notes. "However, you may be dealing with a customer with very high volume, or very low volume. And that's just the starting point for sales people, who also benefit from information about what other customers in the same specialties, in other parts of the country, are paying.

Then, the results are processed nearly real-time, and fed back to the sales personnel in a "constant feedback loop," he says. "That way, the business takes ownership of the data, and information about how customers are reacting."

The finance chief doesn't talk about the increase in margins resulting from use of the software at his unit, noting that "it really does vary widely," and that his segment of McKesson doesn't break out such numbers. "Leave it to say that we did see a marked improvement in our pricing," he says, pointing to an oft-quoted 20-year-old McKinsey study that showed a 1% increase in price delivering as much as a 10% rise in operating profits. "That roughly translates to our experience," Vitalone says.

There is, however, a training side to arming sales people via the technology, in part because so much information makes them analysts, in effect, capable of gaming the system for their own benefit. "There is a big communication aspect to this," according to Vitalone. "Data can be very powerful, but it's also very dangerous."

The Price of an Airline Seat

Andres Reiner, the PROS chief executive, believes that the profit-boosting power of optimal pricing is a critical advantage for companies facing the current turbulent environment, "with commodity prices, currency fluctuations, and other elements playing havoc with conventional planning." Firms, he says, now must "be more agile in triggering price changes during the year, rather than once every year or two."

Software offerings from the range of providers --- mostly aimed at transmitting data to individual sales personnel --- have multiplied to help business-to-business customers cope, he says. In decentralized sales operations, especially, "companies today have very rich data, but they don't have the tools to utilize that data to help them price better." Pricing-optimization software lets companies "create like segments that behave together," something that normally is "a very heavy, manually intensive process." Using his company's software, he says, "you manage your discount policies, compare segments that are alike," and include information, tailored to a company's own situation, to help "focus on moving your lowest prices up to an average price."


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