Price Optimization: The Next Big Opportunity in Supply Chain

Companies across virtually all industries are looking for ways to drive profitable growth. After capturing many of the “low hanging fruit” benefits from ERP, CRM, and other supply chain applications, many companies are now asking, “Where is the next big opportunity to realize significant business benefits?” For many, the answer is Price Optimization. What is price optimization? Why is it important? What capabilities should companies look for in a solution? Those are some of the key questions I discussed with Cliff Isaacson, Executive VP, Product Strategy at Blue Ridge Global, during a recent episode of Talking Logistics.  

What is Price Optimization?

Since some readers may not be familiar with Price Optimization, I began our discussion by asking Cliff to define it. Cliff notes that at the basic level, “Price Optimization is setting prices based on market conditions and customer willingness to pay. Beneath that there is a lot of complexity such as supplier constraints, price introduction, and product end-of-life. It’s getting away from what people call ‘cost plus.’ If you’re taking cost and adding some margin to it without understanding the value to the customer, you’re not doing price optimization. So, I define it as setting the right price at the right time for the right product given the right customer.”

The Business Case for Price Optimization

What is the value proposition and business case for Price Optimization? Cliff says that it is used differently by different companies, but in the end, “pricing drops to the bottom line very quickly. When you change prices, you’re going to see a change in your financial position. A lot of studies have shown that when you improve pricing, it can have a two-to-four times better profit impact than a cost of goods sold (COGS) reduction.

“Also, price inconsistency can impact how customers perceive you. So, if you improve pricing, you can also improve customer satisfaction. There is also big value in demand management. When you can use pricing to get better control of your demand forecast, that can be very powerful.”

Value of Price Optimization in Supply Chain

This discipline has most often been associated with sales or other front-end processes. But more recently Price Optimization has been recognized as providing great value to supply chain operations too. I asked Cliff to explain.

Cliff comments that there has been a big uptick in interest over the past 12 months. “Companies hold close to the vest their commodity ‘A’ items which might have competitive substitutes and are price sensitive. When you change the price of those, you can really change demand. That is price sensitivity. In the end, when you drop the price, you tend to sell more things (certainly for fast-moving ‘A’ items) and that demand response should be fed into a demand forecast.

“On the flip side, when you’re doing replenishment and placing orders with suppliers, there are volume pricing considerations for filling up a truck or container. To do that you need to pull forward demand. This results in inventory overages on some items which adds a variety of different costs. Pricing is a great way to bring down the inventory levels of those overage items. Conversely, price optimization helps prevent sales from lowering prices on scare items. This applies to both list price and net price, whose importance varies according to the use case.”

Growth Trends

As Cliff mentioned earlier, there has been increased interest in Price Optimization over the past year. What is driving this growth? Cliff explains that for a long time there have been separate retail price optimization solutions and vendors, as well as B2B pricing vendors and solutions. Those two areas are starting to converge now, along with supply chain planning. “A couple of years ago, you would talk about S&OP technologies and processes very differently from closer-in statistical demand forecasting,” says Cliff. “Those are really together now and talked about as a single coordinated and integrated supply chain planning function. The same is true with pricing and supply chain planning.

“What we’ve seen recently is extreme supplier volatility and great fluctuations in costs. There have also been new peaks in demand for certain product categories and increases in sales channels, particularly e-commerce, with huge shifts in demand. The move to e-commerce and the volatility of costs is driving companies to recognize that there is a need for better pricing to control their margins.”

Becoming a Leader in Price Optimization

If you are just starting your journey for Price Optimization, what organizational and technology capabilities do you need to build this discipline? And if you are already into this journey, what additional capabilities do you need to become a leader in this field and create a competitive advantage? Cliff provided some great insights and advice on those questions and more, so I recommend that you watch the full episode for all the details. Then post a comment and share your own thoughts and experiences. 

Editor’s Note: Adelante will soon publish a market research report on Price Optimization Software, which will provide an overview of the price optimization market, the vendor landscape, and key trends driving growth in the industry. The report profiles 17 vendors in the market, including Blue Ridge Global featured in this episode. If you’re interested in learning more about the report, please contact us.