Guest Post by Tom Nagle
This is an excerpt from Tom Nagle’s new article titled “Price vs. Value Management – Know the Difference”. To read the full article, please click the link at the bottom of this post.
Pricing software has evolved immensely in its use and sophistication over the past twenty years. Initially, businesses launched software based on the silly idea that they would “optimize” price for each customer. That idea died pretty quickly on the realization that customers will adapt their behavior to avoid being treated unfairly. Today, software can enable a firm to implement and enforce complex pricing policies, can enable a sales rep to justify price based on value, and can track whether what customers pay is actually what they agreed to in a contract. But, contrary to what a vendor may claim, pricing software will not necessarily make your business more profitable.
Recently, I was consulting with a large, multi-divisional equipment company which asked me this question: “Which software should we buy for value-based pricing?” The answer lies in the particular problems that you are hoping to overcome by using the software. Creating a successful value-based pricing strategy involves five very different activities.
The most common use of software is for management of prices and pricing policies. The goal of price management is to ensure that your sales and distribution organization is actually doing what you want them to do with regard to price management. The same software can help with price policy formulation by enabling you to track the impact of changes in policy on sales. If you put in an end-of-quarter discount, it is easy to see the increase in end-of-quarter sales. It is very difficult, without software, to track the extent to which an end-of-quarter discount actually increases sales overall, or just shifts sales to an earlier quarter at a huge cost in forgone margin. Finally, the same software can help to monitor the effectiveness of your price structure. Are customers buying your product offers in the locations where you expected, or are they “leaking” into other offers and locations that are cheaper?
Much less common is the use of software for value management, even though value management is as important an element in value-based pricing as is price management. Value management involves creating the potential for profitable pricing that price management enables the firm to realize. The two obvious aspects of value management are value creation and value communication.
Dr. Nagle founded the Strategic Pricing Group in 1987, the year he published the first edition of The Strategy and Tactics of Pricing. He provides the intellectual leadership for the firm’s consulting projects and is a highly sought-after speaker and author, both in the U.S. and abroad. A long term sponsor of the Professional Pricing Society, Dr. Nagle is a frequent keynote speaker at their annual conferences. Prior to founding SPG, Dr. Nagle was a professor of marketing and strategy at the University of Chicago and Boston University. He is a graduate of Penn State University and received his PhD from UCLA.