leveraging price management

In the current turbulent times, organizations are trying to

look for measures to contain the cost of products or services.

However, pricing and its impact on profitability is largely

ignored. This paper attempts to discuss how prices can be

managed effectively to increase profitability, the

importance of pricing as a discipline, and the benefits an

organization can reap by adopting a systematic approach in

enforcing and managing pricing. This paper also elaborates

on various aspects of a Price Management solution and the

requisite of optimization capabilities in such a solution. It

concludes with the key considerations involved in

deploying a Price Management solution.

Leveraging Price Management to Improve Profitability

1Leveraging Price Management to Improve Profitability

Table of Content

1. Introduction to Price Management 3

2. TCS Approach to Price Management 5

4. Price Management Solution Deployment 9

5. Integration of Price Management Solution with Enterprise Application 12

5. Conclusion 15

6. List of Abbreviations 16

3. Price Management Solution 5


About the Author

Purushottam Nivaskar

Purushottam Nivaskar has over 15 years of experience in

the IT Industry, of which the last seven years have been

spent in various Business Intelligence projects. Since

2007, he has been leading the Price Management

initiatives within the HiTech Industry Solution Unit in

Tata Consultancy Services (TCS).

Introduction to Price Management

Traditionally in a competitive market, profit improvement is viewed as a function of reduced costs. Adequate thought

is not applied to the importance and the ability of pricing to improve profit, without it having a negative impact on

other strategic objectives such as volumes and revenue.

General observations on price reveal that all productivity improvement measures through automations of processes

in supply chains, manufacturing, distribution networks and tracking customer orders focus on improving efficiency

to reduce the overall fixed and variable cost. However the mechanisms used for pricing a product have remained

relatively manual like using spreadsheets and macros.

At times, critical information such as competitive data, price lists, bundled offers and the pricing strategy remain

locked in spreadsheets of individuals. This reduces the ability of the organization to effectively leverage such

information in activities such as price setting, offer creation, Request for Proposal (RFP) responses and competitive

analysis. The processes are highly individual dependent, restricting the ability of organizations to respond

dynamically to the changing market environment.

It is observed that in a given situation, increasing the price yields more profit margin compared to reducing the cost of

a product. As illustrated in Table-1, an increase in price by 10 percent results in 10 percent more profit compared to

reduction of cost by 10 percent.

Also, it is observed that if business is operating on a very thin margin, then the impact of increased price on profit is

significantly more. As an example in Table 2, even with 10 percent increase in price, profit increases by 100 percent.

This is highly critical in the current business scenario of weakening demand and depressing revenue and profits.

However, the realities of the marketplace are not so straightforward. Ad-hoc price increase can deter customers from

purchasing or expose opportunities for competitors. On the other hand, ad-hoc price reduction can impact revenue

3


Baseline

Price

Cost

Profit

Price

Cost

Profit

Price

Cost

Profit

80%

20%

30,000.00

24,000.00

6,000.00

33,000.00

24,000.00

9,000.00

30,000.00

21,600.00

8,400.00 600.00

Reduce Cost by 10% Increase Price by 10%Incremental

ProfitIncremental

Profit %

Table 1: Impact on Profit: cost reduction versus price increase

Case 1 Case 2

10%

Baseline

Price

Cost

Profit

Price

Cost

Profit

30,000.00

27,000.00

3,000.00

33,000.00

27,000.00

6,000.00 3,000.00 100%

Increase Price by 10%Incremental

Profit - (Directimpact on

bottomline)

Incremental Profit %

Table 2: Impact of increased price on profit margin

90%

10%


and profitability. The marketplace is continuously evolving. For most of the products, more so in industries which are

at the forefront of the technology revolution such as High Tech, Telecom, Aviation, Utilities, significant R & D cost is

incurred even before it is launched into the market. Some of these products have a very niche market to target. Such

situations, where huge investments are involved and product retiring happen quickly exert immense pressure on

organizations to ensure that they recover the costs (and make profit) within the available product life and market.

Fierce competition and accelerating product commoditization compel organizations to restrict any opportunities of

experimenting with prices.

Organizations considering the option of raising prices without losing market shares are challenged with many

questions such as :! How to find the best price objectively?! How to position this price into the current market situation?! How does this price compare with other competing products?! Is the process to find such revised prices repeatable over a period?! Can it be used consistently by multiple users, for multiple products, for multiple customer segments?

If such questions remain unanswered, organizations tend to get defensive leaving money on the table or use intuition

and apply ad-hoc pricing, both ultimately resulting in revenue leakage and reduced profitability. Hence, finding the

optimum price is very desirable.

Price Management is a discipline that:

Aims to increase revenue and profitability

ces)

! By increasing or avoiding loss of market share! Across one or more company product(s)! Over an extended period of time! In a consistent and predictable manner

By helping to find the optimum price for! Identified product item or product line! In a defined market segment (customer and geography), at a particular time! In a given competitive environment (competing products and pri


TCS Approach to Price Management

Price Management Solution

TCS recommends a holistic view of the pricing processes across the organization. Accordingly, the organization

should identify stakeholders, processes, data elements and technologies involved in the pricing processes.

Organizations must explore opportunities to improve the business processes as well as avenues to leverage

advanced technologies for processing data that add value to these processes. While defining the scope of the Price

Management solution, an organization must identify:

izations must evaluate each opportunity against benefits, costs, payback time and then

prioritize them.

To maximize returns, the Price Management solution must encompass the entire product life cycle. Typically, it

begins with the initial price, when a new product is introduced into the market and ends with the markdown prices

that drive product clearance.

Scope

The Price Management solution must include processes involving the various stake-holders. The key process areas

are illustrated in Fig 1.

! Key pricing processes in the organization! Opportunities of improvement in each of them! Potential benefits of each opportunity! Changes required to improve each process process change definition, impacted users, required data sets, cost

of implementing the change, time/effort required and so on! Key capabilities required in the solution for each of the processes! Once identified, organ

PriceOptimization

PriceExecution

PriceEnforcement

Deal ManagementPrice Rules ManagementContract management

Update Price Repository ERP / CRM / POS Systems Distributors Resellers

Set Product Pricing ObjectivesSet Product Reference PriceSet Product Segmented Prices

Fig 1: Price Management - Key process areas


Price Optimization

These processes help execute SWOT (Strength, Weakness, Opportunities, Threats) analysis, which includes

competitive analysis to identify key focus areas and related pricing strategies.

Price optimization involves processes to:

! Analyze previous data, future trends, competitive information, costs involved and Key Process Indicators (KPIs).

! Segment customers, products and bundles.

! Determine segmented prices and offers.

Price Execution

For any organization, there exists multiple order capturing mechanisms. Some are located within the firm while

others reside on partner networks. Product prices are therefore disseminated from multiple points. Price execution

processes ensure that the right price is made available at every disseminating point at the right time.

Price execution involves processes to: ! Propagate price-lists; offer details, new contracts information to all the points that disseminate prices such as

Point of Sale (POS) systems, deal management systems, information portals for sales force and entities such as

resellers and distributors.

Price Enforcement

The mechanisms enforce applicable pricing rules for each order logged in any of the order capture systems. Based on

the order details such as customer, products, quantity, these processes find out and apply appropriate pricing and

discounting rules. For Business to Business (B2B) orders, relevant contracts, quotes are considered to determine

appropriate price.

Price enforcement involves processes that: ! Enforce prices through pricing rules compliance.! Use workflow-based approval process; facilitate collaboration between different stakeholders while

determining prices and quote responses.

Fig 2 illustrates the key activities that must be performed in Price Management.

1 Set Product PricingObjectives

Define Segments forProduct Customers/

Geo etc.

Analyze KPI trendssuch as - Sales,

Demand

Analyze competitiveInformation

Define Segmented KPItargets - Profitability,

Vol. Rev etc.

Set GlobalReference

Price

Analyze trends -Cost, Demand

Analyze competitiveprice trends against

Ref Price

Analyze Prev. Ref.Price against

actual price trends

UpdateCurrency

References

DefineProduct

segments

Derive Local CurrencyRef price using Global

Ref. price

Collate influencingfactors forsegments

Simulate multipleprices and theirimpact on KPIs

Set productbundles, price

schemes

Communicate Price liststo distributors, channels

Update prices inOMS

Generate PriceLists, Price

Books

Update PriceMaster

Repository

RegisterQuote

Request

CreateQuote

Response

ValidateQuote

Response

ModifyRFQ

Response

SubmitQuote toCustomer

RegisterOrder

What-ifAnalysis

ScatterPlots

Waterfall AnalysisTrend Analysis

Set Product Reference Price

Set Product Segmented Price

Update PriceRepositories

Deal Management

Analytics6

5

4

3

2

Fig 2: Price Management - Processes

Processes 1, 2, 3, 6 represent Price optimization functions

Processes 4, 6 represent Price execution functions

Processes 5, 6 represent Price enforcement functions

Benefits

Each of the process categories brings in distinct benefits to the organization. Price optimization processes facilitate

high quality analytics, unearthing valuable opportunities to optimize prices for various customer segments. The

segmented prices have direct impact on the revenue and profitability.

Price execution processes facilitate efficient distribution of prices, avoiding delays and inconsistencies, minimizing

loss of opportunities and revenue leakage.

Price enforcement processes facilitate complex order and quote management capabilities along with a

collaborative workflow-based approval process. These ensure that the complex pricing structures are complied with

while processing orders/quotes avoiding errors in order processing. This is very critical to ensure rule-based and

consistent pricing.

Following are the key benefits of using Price Management Solution:

Recommended capabilities of a Price Management Solution

To achieve the above mentioned benefits, the solution should have commensurate capabilities. The recommended

capabilities in a price management solution are detailed as follows.

Data Modeling

Solution must have flexible modeling capability so that the respective business environment can be represented

appropriately, implying that the various data elements (customer, geography, product, competition and so on) are

captured with their respective hierarchies and inter-relations. Solution must facilitate changes to the model in an

efficient manner. It must also support large data sets for analysis, supported by advanced statistical functions.

Scenario Planning

Solution must have a What-if analysis capability to simulate different scenarios. For example, simulate price

changes by 10% or 14% and visualize the impact on say, sales volume, revenue for each of the price change.

Analytical Reporting

For the end-user, the solution is as good as its reporting capability. Hence, the solution must be able to generate

reports according to the requirements. Multi-dimensional analytical reports with drill up-down reports, graph and

! Faster pricing decisions enabling quick response to the fluctuating market situation. ! Centralized, consistent and transparent pricing processes that establish pricing discipline across the

organization.! Increased leverage of pricing related data unearthing hidden trends and opportunities.! Improved predictive analysis assessing multiple scenarios and facilitating informed decisions.! Increased collaboration and accountability for stakeholders facilitating collective decision-making and

transparency.

These result in:! Improved deal win-loss ratio.! Increased profitability and revenue.

7



charts creation capabilities are a must. Availability of predefined templates such as waterfall analysis, scatter plots

can add value to the solution.

Price List Management

The solution must be capable of creating and updating multiple price-lists. Also, it should be able to propagate the

price-lists to various order capture systems, with utmost transparency and efficiency.

Workflow-based Approval Process

With this, it must be possible for different stakeholders to collaborate and share information. This is very useful for

the sales team spread across different geographical locations, as they can collaborate while responding to a quote

request from a customer. Also, this can be effectively used by the pricing analysts who create reference prices.

Security

The solution must have a role-based, data-level security. Also, users must have the flexibility to share specific data

with each other at their discretion. This is essential to facilitate collaborative decision making. The solution must

enable the administrators and supervisors to manage and track user security.

On a decision to implement Price Management Solution, it is extremely important to analyze the pricing related

information.

Key Considerations

Some of the key points that one needs to ponder upon are:

Price Management Solution Deployment

9


Points Explanation

1 Which business processes are impacted by this solution?

Who are the stake-holders of this solution?

For example, pricing analysts, sales force, product managers, sales and marketing heads and senior management.

2 What is the frequency of accessing this solution?

For example, time-based access (daily, weekly or ad-hoc) or transaction-based access (like for every deal).

3 What is the type of usage? How are we going to use this?

For example, do we need standard, template-based information every time or do we have an ad-hoc data request based on the requirement?

4 How to make this solution available to users?

How do we ensure that for every user category, there is an optimal mechanism for delivery of information? Is it possible to minimize the learning curve of the pricing solution? Is it possible to leverage the existing core applications that users are already familiar with?

5 What are the options to build this capability?

Should we build an in-house application? Will it have enough functionality and scalability?

What are the different tools available in the market? How do we compare them and find the tool that best fits our technology landscape?

Do we need a platform-based solution or a niche, best-of-breed solution? How do we integrate a best-of-breed solution into our technology landscape?

Last but not the least, what is the Total Cost of Ownership (TCO)?

10


Deployment Options

Once the stakeholders and requirements are identified, there is a need to decide the deployment options.

Considering the complexity of a comprehensive price management solution, there are three options

1. Custom-built solution.

2. Enterprise Application Platform-based solution.

3. Best-of-breed Price Management solution.

Custom-built solutions

In-house (custom-built) solutions must be considered for very specific needs where, there is no expectation of

enhancing the functional scope of the application. It can be a very cost-effective solution if the requirements do not

need very advanced capabilities such as scenario planning.

Enterprise Application Platform-based solution

If business is looking only for Price Enforcement, Enterprise application-based solution is relatively simpler. But these

applications may not have built-in capabilities for Price Optimization.

According to the current scenario, Price Optimization capabilities are best available in best-of-breed solutions

compared to platform-based solutions.

Thus, we recommend using a best-of-breed Price Management solution that offers a highly flexible architecture

and features.

Best-of-breed solution

'Best-of-breed' solution is an off-the shelf niche product/solution that is best suited for a specific business

need. It provides maximum capability compared to alternative solutions such as modules from enterprise

applications, catering to this business need. It may need some configuration efforts to make it usable for

organization's requirements.

Typically, there are two ways of deploying a Best-of-breed solution: ! Deploying as a stand-alone solution in the organization.! Deploying the solution as Services and using these services in another core enterprise application such as ERP,

CRM to offer seamless integration with the overall IT landscape.

Before considering the merits of these approaches lets consider user groups. Analysis of different users reveals two

broad categories of users. Power Users - users like Pricing Analysts, Product Managers, who have ad-hoc analysis

requirements. Normal Users - users like geographically-spread sales representatives, who need fairly standard sets

of analytics for different customers and products. Typically, there is fairly limited number of Power Users in an

organization whereas; there are a lot of Normal Users

Stand-alone Best-of-breed solution

Deploying the solution as a stand-alone solution favors the Power Users but not the majority of the Normal Users.

Normal Users typically need template-based information for a transaction such as, response to new quote request. In

this case, they will have to enter the deal information to obtain the template-based analysis of data. They have to first

learn a new tool and also spend time accessing the analytical information each time they need to. Hence, there is a

definite overhead of learning the new tool and the redundancy of data entry. This may lead to resistance from the user

community. Also this may impact the licensing cost of the tool.

11


Custom-built ApplicationPrice Optimization

Cost Ownership

Development Efforts

Learning Curve

Advanced Analytics

Scalability

Extensibility

ReliabilityData Synchronization with other systems

Price Execution

Price Enforcement

Enterprise Application

Best of Breed Solutionintegrated with EnterpriseApplication

For rest of the parameters

For Development Efforts andCost of Ownership

Low onDesirability

High onDesirability

Very High

High

Moderate

Reasonable

Low

1

2

3

4

5

Low onDesirability

High onDesirability

Limited

Fair

Moderate

Good

Excellent

1

2

3

4

5

Best-of-breed solution integrated with enterprise application using Service Oriented Architecture (SOA)

If the solution is deployed as a Service and integrated through enterprise application based on SOA, then the

Normal Users will be benefited as they can leverage their core enterprise application to exchange information

and obtain the analytics information without much effort. However, this type of deployment will severely restrict

the Power Users who would want to use the advanced features of the tool to obtain ad-hoc reports to facilitate

decision making.

Recommended Approach

As most of the organizations will have both types of users (Power and Normal), the best way to deploy this kind of

solution is to use both modes of deployments. Apart from providing the right kind of environment to each user

category, there are many benefits in using such a multi-mode deployment. The core enterprise applications such as,

ERP, CRM contain majority of the base data required by the Pricing Solution. Real time bridges to exchange customer

information, product information, quotes requests, sales data and other related information can be established

For Power Users, this will ensure that Pricing Solution remains in synchronization with the core enterprise

application. This ensures that analytics uses the latest data (apart from the previous data that it contains), that is very

critical for decision making.

For Normal Users, the predefined services exposed by the pricing solution, provide access to the predefined analytics

without extra efforts. Once the SOA-based interface is built, then accessing the predefined sets of analytics is very

simple and quick and does not require any extra efforts from the user. There is neither a need to learn any new tool nor

extra licensing cost involved.

Fig 3: Comparison of three approaches

*Note: The comparison can vary based on actual applications / products chosen and the customer IT, functional landscape

Fig 3 summarizes the comparison of the three approaches.

Integration of Price Management Solution with Enterprise Application

To explain the recommended approach, we will analyze the aspects of integrating the Price Management Solution

with the popular enterprise application suite, SAP.

Consider a use-case of Quote Management.

Typically, the steps in the process are:

1. Customer approaches a sales representative with Request for Quote (RFQ)

2. Sales representative registers the quote request in SAP Customer Relationship Management (CRM).

3. Sales representative analyzes the deal request and works out the best possible quote.

4. Sales representative sends the proposed quotation to the supervisor for approval.

5. Supervisor reviews the deal and approves (or rejects) the quotation.

Fig 4 illustrates how a Price Management solution can be leveraged in the Quote Management process of a typical

enterprise application such as SAP CRM (please note that similar integration can be possible with other ERP applications. SAP CRM is taken

for example purpose only). The Quote Management process spans across the SAP CRM and Price Management Tool. The

Netweaver Composition layer provides the business logic by interacting with the backend systems through Services.

The process is presented to the user through User Interfaces (UIs) in the Enterprise Portal.

12


Create Quote

SAP EnterprisePortal

Backend SystemData Synchronization

NetweaverCompositionEnvironment

(Services / API)

SAPPrice

ManagementTool

RegisterQuote

Request

Create /ModifyQuote

Quote Analysis &Confirmation Quote Review

Approve /RejectQuote

AnalyticsModify Quote

Fig 4: Proposed solution using SAP SOA

Solution Architecture

The Quote Management process discussed above can be realized using SAP Service SOA. Fig 5 provides an overview

of the architecture at a high level.

The SAP CRM functionalities are exposed through SAP Enterprise Services, Web Services and (or) Business

Application Programming Interfaces (BAPIs). The Price Management tool functions are also exposed as web

services. These services are published in the service registry of the landscape. The Composite layer consumes these

services to build the solution application. The user is provided with a role based access to the Composite through the

Enterprise Portal.

SAP Process Integration layer can be used to provide automated synchronization between the SAP CRM and

the Price Management solution. It can also be used to build and extend the SAP Enterprise Services required for

the solution.

13


Service Registry

Enterprise Portal

Server SAP NetWeaver WAS 7.0

SAP NetWeaver CE Server

Automated Synchronization

(Optional)

Fig 5: Solution Architecture

SAPCRM

EntWeb Services and

BAPIs

erprise Services,

Web Services

Price Management

Tool

SAPPI

Composite Application

Composite layer and SAP tools

Fig 6 summarizes the layers of the composite application along with the SAP tools used to implement them.

The layers Process Workflow layer, User Interface layer and Composite Application Framework (CAF) Service layer

constitute the composite application. The CAF service layer is the business logic layer that interacts with the services

of SAP CRM and Price Management tool. It also provides local persistency and additional application logic support.

The User Interface layer provides the capability to define role-based user interfaces. The Process Workflow layer

implements the Quote Management process, which is accessed by the enduser through the Enterprise Portal. SAP

Netweaver provides the tools and the platform to implement the above mentioned layers.

14


Service Registry

Process Workflow

User Interface Layer

CAF Service Layer

Guided Procedures

Enterprise Service

Service Provisioning Layer

Fig 6: Composite Layers

SAP Tools

SAP Enterprise

SAP Process

CAF - NWDS

Process

Role Based access on Portal

Conclusion

By deploying Price Management solution, organizations can establish and exert control over the pricing processes.

Using scenario planning capabilities, they can increase predictability of various KPIs like sales volume, sales revenue,

margins and market share. Using analytical capabilities, they can leverage their own data and competitive data to

understand the competitiveness of the market. By establishing workflow based pricing processes, organizations can

bring in transparency, discipline and accountability in the function of price management.

By adopting multi-mode deployment strategy, an organization can service its different user segments in the best

possible manner. The price management solution will have a very small footprint, but can still benefit a larger user-

base. By establishing a bridge between the enterprise application and the price management solution, the entire

pricing process can leverage latest data from the enterprise application thereby significantly improving its currency,

which is very critical in the highly dynamic market environment.

Thus, the implementation of Price Management solution results in improved governance, quality and speed of the

pricing process, thereby providing opportunities to improve profitability and revenue. Fig 7 summarizes the benefits

of implementing a suitable Price Management solution.

15


Fig 7: Price Management Improvement benefits summary

ImprovedProfitability

andRevenue

Improved Win-Loss Ratio

Organization Benefits

Business Benefits

Fast Pricing DecisionsConsistent Pricing Policies

Empowered Field StaffAbility to Leverage Intelligence Data

Holistic View of Pricing Data

Advanced Analytical Capabilities

Institutionalized, Integrated Process

Increased transparency and Accountability

Process Benefits

Term Description

RFP Request for Proposal

KPI Key Performance Indicator

SOA Service Oriented Architecture

CRM Customer Relationship Management

ERP Enterprise Resource Planning

R&D Research and Development

SWOT Strength, Weakness, Opportunities, Threats

POS Point-of-Sale

B2B Business to Business

TCO Total cost of ownership

16


List of Abbreviations

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Copyright 2009 Tata Consultancy Services Limited

About Tata Consultancy Services (TCS)Tata Consultancy Services Limited is an IT services, business

solutions and outsourcing organization that delivers real results to

global businesses, ensuring a level of certainty no other firm can

match. TCS offers a consulting-led, integrated portfolio of IT and IT-

enabled services delivered through its unique Global Network TMDelivery Model , recognized as the benchmark of excellence in

software development.

A part of the Tata Group, India's largest industrial conglomerate, TCS

has over 100,000 of the world's best trained IT consultants in 50

countries. The company generated consolidated revenues of US

$5.7 billion for fiscal year ended 31 March 2008 and is listed on the

National Stock Exchange and Bombay Stock Exchange in India. For

more information, visit us at www.tcs.com

www.tcs.com

To know more about how we help companies in the High Tech

Industry overcome their challenges and achieve real business

results, email us at [email protected]

About HiTech Industry Solution UnitTCS HiTech Industry Solution Unit comprises of Semiconductors,

Electronics, Computer Platforms & Services, Software industry and

Professional Services. At TCS, we leverage our experience in

Engineering Services, Business Process Transformation, end-to-end

IT Solutions and Infrastructure Services to provide comprehensive

solutions that will help the High Tech firms and manufactures

accelerate product innovation, achieve operational excellence,

attain greater profitability and maintain market leadership.

Our proven consulting capabilities, Extensive engineering

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