In 2011, the business magnate and “Oracle of Ohama” Warren Buffet declared that one of the main criteria for deciding to invest in a company was its ability to set prices. Or more precisely, to increase them without being petrified by the risk of losing customers to competitors. Which would be, that’s right, a serious problem.
Artificial Intelligence does more than contribute to this. It significantly expands the boundaries of what can be achieved. How?
Schneider Electric US: from “cost pass through” challenge to optimizing margins
After 10 years of patiently progressing on price management, Schneider Electric US had reached the limits of using traditional tools. Too slow and lacking in precision, price setting was also hampered by a pitfall: pushing the right price information to each salesperson at the right time, on the right device or application.
The issue remained unchanged: how to better offset cost inflation while improving the company’s margins?
The company decided to use the “Price IQ” solution from Zilliant, based on predictive optimization algorithms, exploiting transactional and competitive data in complex business contexts. The pricing team remains in the driver’s seat as they command very precisely their objectives (revenue or margin orientation) as well as the constraints of pricing coherence.
In the case of Schneider Electric US, the results were striking: faster and more accurate in responding to fluctuations in material costs, the company was able to improve its margins by several points while achieving its revenue and market share targets.
AI based Price IQ enables a breakthrough in the company’s ability to extract more value from its commercial relationships.
With much more efficient and consistent pricing recommendations, a stronger linkage of sales strategy, pricing policy and execution,
the solution has considerably enhanced commercial governance and empowered both management and sales teams.
The main factor of failure is change management
Technology however will not do the job by itself; change management is critical. If not properly addressed or performed, there is a high risk of partial or even lasting and painful failure.
Simply automating the existing rules will not get you much further. Technology and Machine Learning open possibilities hitherto unsuspected or deemed out of reach.
Designing innovative or more sophisticated pricing models is often a condition to obtain significant results in the medium and long term. Provided these models make sense and add value for each stakeholder: sales people, customers, finance and even manufacturing.
To ensure that, start from a solid understanding of the business and the market fundamentals, of your strengths and weaknesses, of the customers expectations and price / purchase behavior as well as of the value and cost drivers for both your business and your customers.
Paying attention to the foot soldier (the sales person) is crucial, yet often overlooked in pricing projects. Success also relies on your ability to ease the daily life of this key person with operational tools. And, equally, to challenge conventional ideas and myths about pricing that limit adoption of new practices.
Finally, it is essential to understand that pricing is not a pure operational discipline that may be performed by experts in a silo. The cross-functional and transforming dimension of pricing cannot stop at the borders of a project. The commitment of top executives is required to relentless build a set of capabilities and collaboration across the company
Should you too progress patiently for the next 10 years?
As already stated, pricing is a journey, not a 6 to 12 month project, as are lean manufacturing or safety performance.
1) No company in the world spends 10 years improving an Excel based system before investing in a shop floor management system.
2) Most managers understand that a shop floor management system will prove useful when applied to an already organized (rather than chaotic) operation, yet will mean some change and transformation.
This also applies perfectly to pricing: do not wait until you reach the limits of your current methods and tools. Speed up now, because your competitive environment won’t leave you alone for 10 years.