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PROS Holdings, a provider of price and revenue optimization software, has an agreement in principle to acquire Cameleon Software, which offers configure, price and quote (CPQ) applications. The combined company is likely to benefit from a broader geographic presence (PROS is based in Houston while Cameleon is in Toulouse, France) for their sales and marketing efforts. However, the longer-term strategic value of the merger lies in the combination of the related categories of price optimization and CPQ to improve sales effectiveness and financial performance.
Price and revenue optimization, which I have written about before, is a business discipline used to effect demand-based pricing; it applies market segmentation techniques to achieve strategic objectives such as increased profitability, greater market share or both. Software to manage price and revenue optimization first came into wide use in the airline and hospitality industries in the 1980s as a way of maximizing returns from less flexible travelers (such as people on business trips) while minimizing the unsold inventory by selling incremental seats on flights or hotel room nights at discounted prices to more discretionary buyers (typically vacationers). Today, it is a well-established part of any business strategy in the travel industry and is increasingly used in others including retailing (chiefly through mark-down management), financial services and many business-to-business verticals. PROS started in the travel and hospitality industry, which accounted for 44 percent of its 2012 revenues, but its recent growth and focus have been more in manufacturing, distribution and services; those customers accounted for 56 percent of 2012 sales.
For its part, CPQ software emerged to make the process of configuring complex products more efficient. This issue is of particular importance for industrial companies that sell to other businesses. A Class 8 truck, for example, has multiple options for mechanical parts such as the engine, transmission and braking system, as well as comfort features for the cab such as air conditioning and the radio/audio system. Assembling the various piece-parts of an offering manually, determining that the configuration is a valid one (for instance, whether transmission Y actually works with engine X) and calculating a basic offer price can be time-consuming and error-prone. CPQ software enables those quoting a price to quickly develop even multiple proposals for a prospective buyer. This is a well-established software category. Our benchmark research shows that about half of all companies with 1,000 or more employees use it, another one-third intend to deploy it and only 17 percent have no plans to use it.
Although valuable on its own, when CPQ software is joined to price and revenue optimization in an end-to-end, lead-to-order process, it increases the effectiveness of that process by giving sellers more ways to intelligently manage volumes and margins through altering the cost of individual components. For instance, the base price of a unit may be priced with little or no markup if the goal is to generate margin on the other parts of the sale. (This is similar to many retailers’ strategies except that the price of each piece of the transaction may be negotiated and the prices involved are often considerably greater.) Optimization software can enable sellers to achieve their revenue and margin targets by using purchase behavior patterns to better assess the buyer’s price elasticity. Indeed, the choice of certain components themselves may provide sellers with clues about the buyer’s overall price sensitivity: For instance, those wanting certain features, brands or grades may be less inclined to negotiate and therefore should be quoted a higher price. (Similarly, certain online merchants have been found to charge buyers using Apple products more than others.) Thus when price optimization is part of the business logic in using CPQ software, it makes the software more helpful to the user.
Viewed from the other side of the combination, adding a native CPQ capability to price and revenue optimization software makes the analytics far more actionable because it can support an end-to-end process. Although PROS has had CPQ capabilities in its Quote2Win application, they are not as robust as what’s available in Cameleon, which provides configuration capabilities and guided selling. PROS has published APIs to facilitate integration with CPQ systems, but integration out of the box with a full-featured application is certainly better. One of the biggest barriers to more widespread adoption of price and revenue optimization is that products don’t always enable user organizations to easily embed the analytics and data that drive optimization directly into the sales process.
Businesses that first adopted price optimization (and which have the deepest penetration) include travel, hospitality and retail mark-down management. Their common characteristic is that all are (or started out as) relatively simple products (say, a round-trip seat or a dress) for which prices are set, not negotiated. Business-to-business (B2B) transactions, however, often are more complex because the product often is a bundle of physical goods, services, warranties and ancillary provisions such as delivery. Moreover, typically these transactions involve some negotiation allow the sales representative a degree of freedom in setting prices and discounts. Having the actual price being quoted is critical for to capture and use in the sales process as our research in sales forecasting found that pricing data is one of the top components in 48 percent of organizations but so is the configuration of products to 22% percent of organizations and want it to be included in the sales forecast. Because the process is more complicated, prospective users of price optimization may find it daunting to adopt the strategy. In theory at least, adding a robust CPQ capability should make it easier for a company to implement a successful price and revenue optimization strategy in a reasonable period of time.
Decades of experience have demonstrated the value of this software category. Without the benefit of price optimization applications, it is almost impossible to assess a customer’s demand elasticity to determine an optimal offer price. Margin may be lost unnecessarily when sales people default to discounting to ensure a sale. Simple up-sell and cross-sell strategies can be beneficial, but they can fall short of what’s optimal and – increasingly – what’s possible. Having software to better gauge price sensitivity and control more elements of a negotiation with greater visibility into its profitability can help companies achieve an optimal balance of revenue and margin. The process can be even more effective when it’s coupled with sales incentive management software. All of which points to improving the sales process and our latest research in sales found that inconsistent execution is the largest impediment in 53 percent of organizations that is motivating management to invest into sales technology like CPQ and pricing optimization.
Organizational issues also have inhibited adoption of price and revenue optimization strategies in industrial companies as well as the use of this category of software. Responsibility for managing profits usually involves both the finance and sales organizations. Both have roles in handling profitability, but the process is typically simplistic (using up-sell and cross-sell strategies with little regard to the profitability of the components), imperfectly coordinated between Sales and Finance and almost never optimized. Ideally, CEOs and COOs should be initiating an optimization effort, but I find this is rarely the case. Using analytics to manage pricing and support a sophisticated strategy is an important business innovation that industrial and other business-to-business verticals should embrace. Finance organizations – specifically the financial planning and analysis (FP&A) group – should take the lead, especially if they want to demonstrate the ability of Finance to deliver more strategic value to the company. Successful price and revenue optimization strategies can provide a sustainable competitive advantage. Companies of course need a pricing strategy; understanding the benefits of price optimization software can help them see what’s possible and develop an implementation plan.
Robert Kugel – SVP Research
This is the beginning of the season when companies that are on a calendar year begin their strategic and long-term planning. Ventana Research performed an extensive investigation in this area with our long-range planning benchmark research. Strategic and long-range planning is a process and discipline that companies use to determine the best strategy for succeeding in the markets they serve and then ensure they have the capabilities and resources needed to support their strategic objectives.
I use the term “strategic planning” to mean the formal conceptualization of strategy, which is more qualitative than quantitative. Typically, it involves a relatively small number of people on the senior leadership team. Long-range planning, on the other hand, is the formal quantification of the strategic plan, which translates ideas into numbers. This process involves fewer and more senior people than the annual budget, and it is designed to serve as a bridge that connects an organization’s strategic conceptualization with its operational planning and financial budgeting.
Our research shows that nearly two-thirds (64%) of participants – all of whom are involved in long-range planning – are satisfied with the results of their process. If that was all there was to it, companies wouldn’t have to worry about how well they connect strategy with execution. However, other financial performance management research we conducted, which includes a broader sample of executives and managers in a variety of corporate roles and departments, paints a different picture. Among those participants, two-thirds (64%) said that their company’s executives have a well-defined strategy, but only 14 percent said that their company manages it well on a consistent basis.
There are complex reasons for the disconnect between corporate strategizing and day-to-day execution. A clear statement of strategic objectives is necessary, of course, but translating it into objectives for business units and individuals is another matter. Typically, executives use a combination of methods for communicating strategy and goals, including verbal iterations, electronic messages and scorecards with quantitative objectives. Executives may think they are communicating effectively, but often their efforts fall short. Our research finds that only one-fourth of participants understand these objectives well. This is often the case, as our long-range planning research finds that only 27 percent of executives communicate clearly and – just as important – consistently. As well, a common management approach is to set specific, measurable objectives for each business unit: About two in five do that. However, these objectives typically focus mainly on financial measures and do not include the nonfinancial objectives that are critical to achieving corporate strategy, among others market share, quality, customer satisfaction and time to market. Fewer than half (45%) of companies lay out formal, strategy-driven objectives in a scorecard, and almost none of those outside of financial services incorporate risk factors as part of their formal assessments. Only one in five find that when they need to determine the underlying facts behind numbers, it’s easy to determine the “what, why and how” behind them. Nearly half (45%) present little or no information about the company’s operating data, and 80 percent get little or no information about leading indicators that would enable managers to anticipate opportunities or issues.
Another aspect of knowing how to manage to the company strategy is understanding how the objectives and actions of one part of the business affect the others. Since most companies do not operate in a rigid command-and-control environment, it is important for managers in one area of the business to be able to anticipate how a change in their part of the company will affect others. An important objective in any corporation is to ensure that strategy and objectives are aligned across departments and business units. Yet only one-fourth of our participants said they have a clear understanding of the specific goals of other parts of the business, such as sales quotas, production targets and profitability, and how these affect their own area. This helps explain other findings described above, such as why so few companies react to changes in their overall business in a well-coordinated fashion – and why it is so common for the left hand not to know what the right is doing.
Since in business the only constant is change, it’s crucial for companies to ensure that they maintain strategic alignment when managing change. Unfortunately, few do. Only 14 percent said that when market or economic conditions change, their company’s response is well coordinated. While six in 10 said their response is somewhat coordinated, I think “somewhat” is an unacceptable standard because it results in diminished performance. After all, a “somewhat coordinated” juggler drops a lot of balls. Improving coordination is an area in which better communication across the company and a clearer view of operations are likely to improve performance in a sustainable fashion. Issues of coordination generally arise from a lack of communication or information availability, both of which reflect what information a company gathers and how it makes it accessible. When the problem is an inability to coordinate actions, the underlying issue usually is an inability to share information easily. Here again, having the means to bring together information from multiple data sources can make it feasible to increase the visibility of actions and status across functional silos.
Improving the connection between strategy and execution starts with a relatively simple conversation between the CEO on the one hand and executives and managers on the other. If asking “What is our strategy?” elicits answers that are inconsistent or rambling (or just blank stares), there’s a strategy communication issue. If the answer to the follow-on question “Can you measure how well you are performing to the company’s strategic objectives?” is no or “sort of,” then the company has a performance measurement or data availability issue or both. Addressing these gaps can go a long way toward diminishing disconnects between strategy and execution. Even if your company does an excellent or very good job of connecting strategy and execution, there is still likely to be room for improvement, especially in terms of providing executives and managers with a more complete view of what’s happening outside of the company, including market trend information and competitive intelligence. Despite a massive, two-decades-long investment in making business data of all types widely available, a majority of companies have yet to fully break free of process and management behavior constraints that are artifacts of a bygone, information-poor era. At the start of the strategic and long-range planning season, it’s time to think about translating all of the thoughtfulness and hard work into better execution.
Robert Kugel – SVP Research