It was make or break time for Ranuko Godfrey. Two years ago, his fledgling software company, Project Locker, of Atlanta, had the two things that should spell success for any business. Godfrey, A founding partner and vice president of technology, had a roster of paying customers and a line of quality products and services they were happy to buy.
And yet, Project Locker was barely hanging on.
The pricing trap
The problem was in the pricing. “Our quoting process was totally broken,” says Godfrey who admits to being too timid at the time to charge clients full price. “We would sit down with our pricing sheets and say to ourselves, ‘We can’t charge them this,’ and then we’d slash our estimates by sometimes as much as 60 percent.”
What happened to Godfrey is a perfect example of the pricing trap many entrepreneurs fall into and most never escape. “They tend to not have training in pricing strategies," says Reuben Swartz, a pricing consultant from Austin, Texas, "and typically undervalue their time.”
Swartz, who authors the popular blog Dollars and Sense: The Pricing Blog, offers his clients not only consulting advice, but a line of Web-based pricing analytics software, as well, through his company Mimiran.
A new killer app
Pricing software is an ill-defined area of the business application market. “It’s not an obvious niche like accounting,” says Swartz.
And, yet, it’s increasingly seen as the fast track to profitability. In a recent report, Robert Desisto, Gartner's vice president of research, wrote, "Through 2009, price optimization technology will have the greatest impact on improving the top line revenue and profitability of any business application.”
In addition to Mimiran, other software companies in the pricing analytics field include Oracle, Zilliant, Vendavo, and Vistaar. Most of these firms primarily market to big-ticket clients, although some do scale down for small and mid-size businesses. Modest-size businesses that find pricing software worth the hefty tab are typically juggling a wide variety of products, high volume sales, or a volatile pricing market.
Pricing software typically offers the following features to address those challenges:
Analytics -- This is good way to learn from past mistakes, as well as head off trouble in the works. A good software solution will generate reports that track price waterfalls, profit/loss analysis, sales trends, along with break even charts and forecasting models, experts say.
- Optimization -- These are typically tools that allow managers to play with the numbers -- revenues, surplus, the cost of acquiring each customer, the lifetime value of that customer and the number of sales -- to determine the sweet spot for maximum profits.
- Deal Manager -- It’s not just the value of the data generated that counts. Perhaps just as important is its availability in real time. What good is a blizzard of pricing models or pie charts illustrating sales volume variations at the end of the quarter? Good pricing software provides pricing perimeters, on-the-fly price changing capabilities, fast track approvals for estimates, as well as manages pricing formulas and client-specific contractual obligations.
Finding a pricing program that works
It was, in fact, Mimiran's software that made all the difference for Project Locker. “I can’t over emphasize the impact it had on our business," Godfrey says. "When we saw that 90 percent of our profits were coming from only a quarter of our clients, we realized we had to stop slashing our prices just to close a deal and set our prices according to our true value.” Profits have been up by 50 percent ever since, with the major increase coming from the only two-thirds of the firm's customers.
While it may seem that entrepreneurs and small business owners are a natural market for price setting software, the problem is, well, the price. Most price setting software solutions start in the tens of thousands of dollars. Mimiran's packages for small businesses start at about $25,000.
For the company that can’t get past the sticker shock that comes with all those bells and whistles, there is a way to stick that first proverbial toe in the pool -- for free. Microsoft Excel offers a feature called “Solver” that can be used as a crude price optimization tool. Simply click on “tools,” then “add-ins” and check the “solver” box. Click on “tools” again and you’ll find “solver” on the list. With “solver,” business owners can play with the different numbers that determine price elasticity. There’s a pretty good tutorial on how to use the feature on the Microsoft website. Simply search for “solver.”