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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?

PROS got started 25 years ago, helping airlines with yield management: the near-science of pricing airline seats based on demand and many other factors. "Seats can get spoiled, and you need to get the right price for the right fit," says Reiner, whose company, he says, still has 80% of the market in an airline yield-management business that has become very mature.

Back-End Simplicity

One key measurement of today's wide range of pricing-optimization software products for various industries did derive from the lower-tech airline model: an evaluation of the customer's "willingness to pay," using, in the airline case, booking records, and indications such as whether ticket-buyers planned a short stay, or business or vacation-based flights.

For PROS and other software providers, the information processed in the front-end for corporate clients becomes extremely simple when it is processed for sales personnel on the back-end. It may arrive in the form of a simple quoting tool, product by product, with a target price, a stretch price, and a floor price that sales can use, depending on the situations encountered on-site.

The PROS organization itself uses its own software --- not surprisingly --- and its own CFO, Charles H. Murphy, reports in an e-mail that he, too, benefits. The company's pricing strategies are employed "together with our quoting capabilities to deliver the right price for the right customer, combined with the right approval workflows that support our profitable growth strategies." (Says Reiner of his CFO of 13 years, Murphy has been "instrumental in ensuring PROS' long record of continuous profitability," working with the sales organization and both customers and prospects, "forging long-term, consultative relationships.")

Optimizing Its Own Pricing

The software can be expensive --- for external customers, anyway. Indeed, for the largest companies it can be in the range of $2 million or more. But PROS says that in its case, at least, charges, based on the customer's revenue under management, aren't assessed until customers meet critical implementation milestones and calculate the return on their investment.

Plus, of course, PROS considers the cost to its clients to be dwarfed when the profit result reflects McKinsey's 10%-or-so profit expectation for each 1% boost in pricing. And, says Reiner, "Payback is most times within the first year."

McKesson Medical-Surgical's Vitalone can't report quite that degree of value; payback will be "perhaps a bit longer in our case, as there is an implementation and ramp-up time that need to be factored in," he says. (While he won't discuss what the company pays to PROS, when the $2 million figure is cited he notes that "we did not invest near this level.")

Whatever the actual cost is, though, he adds, "suffice it to say I am pleased with the return for the investment."

 

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