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Information technology enables a data-driven management style that was not feasible until powerful, affordable computers became generally available. There’s no bright line marking when this became possible; the process is ongoing. People were using financial analytics long before ENIAC, the first general-purpose computer, appeared, but the metrics available were not especially timely, broadly applicable to day-to-day situations or comprehensive enough to inform most management decision-making. Even today, there are many areas of business management where companies continue to operate much as they have in the past. One of those is pricing.
Pricing strategies are important because they can have a disproportionate impact (positive and negative) on a company’s bottom line. Managing prices has always been an activity of keen interest, but it has become even more so over the past decade as a result of the constrained pricing environment. In particular the importance of linking pricing to demand has increased. As its name suggests, demand-based pricing is a method that uses the buyer’s demand, based on an estimate of the perceived value of goods or services to the buyer, as the central element in setting an optimal price. Optimal in the sense that it best supports a company’s product and sales strategies; one may wish to be a high-volume, low-price leader while another aims to sell a premium-priced product or service to a specific market segment.
Price and revenue optimization (PRO) is a business discipline used to effect demand-based pricing; it applies market segmentation techniques to achieve strategic objectives such as increased profitability or greater market share. PRO 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-developed part of any business strategy in the travel industry and increasingly used in others.
One reason why transportation and hospitality were early adopters of PRO is that these businesses had access to large data sets on which to base their pricing models and pricing decisions as well as a strong motivation to utilize this technique. (In the case of the major airlines it was the need to be able to offer a limited supply of budget fares to compete with low-cost carriers.) The application of analytics to pricing has spread since the 1980s as other industries have accumulated large-enough data sets to analyze and acquired the computing power and tools to analyze them. Our benchmark research on big data shows that three-fourths of companies are addressing more than 10 gigabytes of data per day and 10 percent are already dealing with a terabyte or more. They need to sift through large data sets to collect buyer behavior characteristics that will enable them to quantify how best to present the offer to each type of prospective customer.
The methodology used in presenting an offer varies by industry because of limitations in the data available to a particular type of business. For example, Web-based consumer businesses attempt to gauge a buyer’s price elasticity based on readily observable demographic characteristics. (One example would be charging Apple computer owners more on the theory that they were able or willing to pay more.) Financial services companies have access to large and rich data sets that provide insight into customer behavior on which to build their price elasticity models. In bricks-and-mortar retailing, buyers are anonymous, so markdown management software must utilize actual sales and inventory data (by definition, things that aren’t selling according to plan are overpriced) and other characteristics (store location and weather, for example) to adjust prices in response to actual demand. In business-to-business selling, disaggregating features and services and then tailoring a mix of these features and services at a range of prices for each is a common approach to optimizing results.
Initially some companies built their own models, but adoption of price and revenue optimization has grown as commercial software has become available. These applications apply complex analytical models and business process management. While software is the key to enabling optimization, success also demands changes in management practices. Frequently the guidance provided by a model runs counter to established practices. For example, in the case of seasonal items in retailing, a couple of small, early price reductions generates more revenue and lower markdown costs than a big percentage cut later to clear unsold merchandise. Financial services companies can charge some of their best customers more because doing so doesn’t have a negative impact on their behavior.
Because a data-driven approach to pricing often goes against the grain of “what everyone knows” and may have a negative impact on some roles or functions in a business, change management is necessary to make the adoption of price and revenue optimization a success. I’ve identified six components that corporations must consider and manage well to be effective in using PRO: strategy, external factors, people, process, information and technology (software). Here are some thoughts on each of them.
Above all, companies must have a realistic pricing strategy that is closely aligned with their capabilities, product strategy and competitive position. In a scale-driven business, for instance, it probably doesn’t make sense for a small player to try to be the low-cost provider. Instead, pricing software enables these companies to find ways to maximize pricing in a price-conscious market by designing offerings with valued features and services that add to their margin.
Pricing strategy and execution must take into account external factors. In particular, different cultures and businesses often have their own attitudes toward fixed and negotiated pricing. In some cases, especially in consumer markets where fixed prices have been the norm, people may consider price optimization unfair. Companies that try to implement a PRO strategy must realize that they may encounter resistance and be careful in how their marketing and communications position their approach to pricing. That noted, despite some annoyance, people have grown accustomed to highly variable pricing by airlines and hotels. Also, there may be legal and regulatory issues that impinge on a company’s pricing flexibility.
As to the people dimension, management needs to ensure that the internal groups involved in pricing are behind the effort. It’s extremely important to align incentives (especially sales compensation) with the price optimization objectives. In many cases, ongoing training will be necessary to continually refine techniques and deal with issues that arise. For some organizations, a “center of pricing excellence” may be a useful way to build on its experience and entrench a culture of price optimization. Exactly how this is handled depends on whether the company has a centralized or decentralized structure to manage pricing.
People and process meet in the ongoing evaluation of price-setting practices by a cross-functional team that incorporates all stakeholders. Initially these people will meet frequently (at least once a month), but it may require only quarterly review as PRO matures. There also must be a well-defined price analytics review process to ensure the methodologies the company is using are sound.
Easy, rapid access to the data needed to support the use of pricing algorithms is a prerequisite for successful implementation of a pricing strategy. Such data feeds the analytics and facilitates rapid pricing-decision cycles. Our research consistently shows that access to the appropriate data is an issue for a majority of companies and that this issue grows in proportion to the company’s size.
Lastly, the company must acquire the right software, implement it properly and tailor it to its needs; it also should be easy to deploy, use and maintain. When it comes to pricing, there can be subtle differences in the needs of particular types of business; prospective buyers should focus on vendors that have strong references in their specific industry.
I recommend that all companies investigate how they can use price and revenue optimization in their business. There are plenty of data and capable analytical tools to help them achieve greater revenue, larger margins or both. Especially in slow growth economies this can be a winning strategy.
Senior Vice President Research
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Infor recently held its annual Innovation Summit at its New York City headquarters. The company has shown leadership and creativity in business applications on two fronts: focusing its development efforts on enhancing the user experience and collaboration and building an application architecture that will deliver a rich set of functionality for ERP, financial management, CRM and HRMS and business analytics in a multitenant cloud environment. All of these advances were necessary to remake a disparate portfolio of aging software into an up-to-date set of applications. The Innovation Summits have been useful indicators of Infor’s future product and market direction. And while there has been a lag between what’s demonstrated and what’s actually available in the software, it’s not clear that this really matters. Any negative impact is limited by the slow replacement cycle for ERP (our research shows that on average companies replace their systems every 6.4 years – longer than they used to take) and conservative attitudes when it comes to core enterprise systems. Innovation doesn’t seem to be a big factor yet in selling business software to mainstream buyers, but it is likely to become more important within a few years. Changes in buyer preferences will come about as technology puts more of the design and operation of these systems in the hands of business users rather than their IT departments and outside consultants. Increasing the configurability and reducing the need for customization will cut costs, reduce the time to value in purchasing replacement applications and increase the flexibility of these notoriously inflexible systems.
Infor is pursuing three major areas of innovation that are central to the emerging next generation of ERP and financial management software.
- One is the addition of analytics, reporting and performance management capabilities to what had been a purely transactional system, which I’ve commented on. Companies now are able to create analyses, reports, dashboards and scorecards directly in the ERP system and in real time rather than having to transfer the data to an analytical application (such as a financial performance management suite) or to a data warehouse where analysis and reporting could be done using a business intelligence tool. This can greatly simplify data management and provide executives and managers with more timely information.
- The second is using in-memory processing and advanced data processing techniques to eliminate batch processing and accelerate the execution of core finance and business functions. Period-end processes that until now have required hours to complete can be finished in minutes; those that have taken minutes can now be done in seconds. Consequently, information that might have been available only monthly can now be presented on a daily or weekly basis. Advanced processing also enables finance organizations to distribute workloads more evenly and help accelerate their close process, potentially by several days.
- The third source of innovation is adding functionality that either extends a business process further upstream or fills in gaps to achieve complete end-to-end automation of a core process. This functionality may take the form of highly configurable enterprise applets offered by vendors that plug into the core application. Or it may be a special-purpose application built on a vendor’s platform that enables a company to fill in functional or process gaps in the vendor’s multitenant ERP offering.
Infor’s product strategy embraces all three sorts of innovation. At the event it showed its matrix of CloudSuite offerings. which combine any or all of three stand-alone applications:
- CloudSuite Financials, which is aimed mainly at services (as opposed to product) companies, supports financial, project, lease and asset accounting.
- CloudSuite Supply Management is purchasing software that manages the full procure-to-pay process and is designed to address the needs of services organizations rather than manufacturing or distribution businesses.
- CloudSuite HCM provides human capital management capabilities.
These products are available today in a single-tenant deployment and will be available in multitenant form in the near future. In addition to a general purpose corporate edition, Infor will design versions of these stand-alone applications to support healthcare companies and public sector entities. Those two industries are important parts of the company’s existing customer base and are likely to benefit from moving to the cloud because of better service (especially faster implementation of patches and upgrades) and greater efficiency.
CloudSuite Financials incorporates the first two types of ERP innovation mentioned above: more capable and flexible data processing structures and in-memory data processing. Because it’s built on a multidimensional data structure, CloudSuite Financials simplifies accounting in companies that have global operations with legal entities that span multiple currencies, accounting standards, tax regimes and regulatory environments. The software also combines transaction processing with computational analytical tasks such as statutory consolidations. To simplify the need to conform to different global requirements, the multidimensional structure and analytical capabilities permit parallel accounting, consolidation and reporting for any of a corporation’s legal entities (including regional parent subsidiaries) as well as the global parent corporation. For example, a company based in the U.S. that has British, German and Japanese subsidiaries can automate the production of financial statements expressed in U.S. dollars that apply this country’s Generally Accepted Accounting Principles (US-GAAP), while simultaneously accounting for the subsidiaries in their local currencies and applying International Financial Reporting Standards (IFRS) in preparing their financial statements. Moreover, by statute all Japanese companies have a fiscal year ending March 31. This, too, is handled in a highly automated fashion by the software entirely within the ERP system. Today, to accomplish these multilevel accounting tasks companies must move and manipulate large amounts of accounting data using multiple applications. Even when they employ a high degree of automation in processing data the process is tedious – even more so when accounting departments use time-consuming and error-prone spreadsheets to perform allocations or calculate adjustments in period-end accounting and closing.
Even companies with less complex and far-reaching corporate structures are likely to find the Financials application easier to use than their existing ERP because, for example, the use of role-based process management and dashboards, the ability of individuals to configure reports to suit their needs and the availability of a range of real-time transaction data for reports and dashboards. The applications also incorporate in-context collaboration using Infor’s Ming.le software.
The third area of innovation in ERP and other applications such as enterprise asset management (EAM) or marketing automation is extending their reach into adjacent or complementary functions that are specific to an industry or a company. Doing so enables companies to manage processes with a higher degree of end-to-end process automation and to collect a broader set of data to use in descriptive, predictive and prescriptive analytics. These extensions can increase the value of an enterprise system for the user organization without its having to heavily modify or rewrite the core software. The extensions could be designed to appear to be an integral part of the core application or served up as a stand-alone enterprise applet that passes data to a core application. Some examples of such extensions come to mind:
- An application that enables a sales or marketing department to quickly create weekly or monthly a personalized electronic sales brochure containing special offers derived from the individual recipient’s specific type of business and items that the customer purchased in the past. Customers would select items and, in so doing, kick off a sales order process that includes all necessary downstream tasks including inventory management, credit approval, order fulfillment and billing.
- An Internet of Things (IoT) data analysis tool that assesses incoming data streams for specific types of equipment and, when certain conditions are met, kicks off one or more business processes in one or more core enterprise applications. For instance, sensor data indicating a maintenance event might start a process in an asset management application and a purchase order workflow related to parts and services that are required.
- A predictive analysis tool that, based on purchases to date, alerts individual customers that they may not achieve minimum requirements under a purchase volume agreement. In addition to generating the reminder, the application might also create a list of offers based on the customer’s past buying behavior.
For this type of software to be useful in a multitenant software-as-a-service (SaaS) environment it must be highly configurable with respect to data elements and process definitions so that it meets the requirements of as many types of business as possible. Greater configurability will make it easier for businesses to set up and modify these extensions without much IT or consultant involvement, making the software more adaptable to changing business conditions. Software vendors that can offer a portfolio of prebuilt, highly configurable extensions to their commodity enterprise applications will have a market advantage.
Infor is developing applications that extend the functionality of its core enterprise software using a cooperative development process with customers that it calls a “hackathon.” Software vendors routinely work on development projects with customers to add significant functionality, often for a specific need in an industry. In this way Infor is attempting, in effect, to productize cooperative development efforts. To facilitate the creation of these sorts of applications, Infor has created (and is enriching) a toolkit that is straightforward to use and streamlines and shortens the process of creating extensions. Through the company’s loosely coupled ION architecture, these extensions can exist separately and be incorporated in one or more types of business applications. Hackathons engage a cross-functional team from a customer, including all relevant business and IT roles, to ensure as much as possible that all requirements are met. So far, the hackathons are aimed more at achieving innovative breakthroughs for the customer rather than incremental enhancements. Their value lies in both the development of differentiated offerings that can attract buyers for a broader suite and a bit of a halo effect that demonstrates the value of innovation in ERP.
Business people have long viewed many enterprise applications, especially ERP and financial management, as IT’s concern, not theirs. They view the system as a given, something whose limits one has to work around because it cannot change. Over the next five years the market for core back-office business applications (such as ERP and EAM) will evolve as buyers become more aware of the new, extended capabilities of these systems. Innovation can create useful product differentiation that leads to a competitive advantage in what has been a relatively hidebound set of software categories (especially ERP). For Infor, innovation has been a way to change the image of its products, which were assembled through the rollup of flagging or failing software companies. Innovation has likely had a positive impact on the company’s ability to retain its installed base and increase its revenue from customers, which is essential to its business model. Gains can come from migrating them from on-premises deployment to a multitenant cloud and by expanding the number of Infor applications that these customers use. This is important. Innovation can help, but in a slowly moving market, sustaining a competitive advantage through innovation is likely to be difficult.
Buyers of enterprise software must keep abreast of what’s possible and available. ERP and financial management applications are undergoing the most significant changes in their structure and capabilities since the 1990s. Infor’s customers in particular should stay on top of what’s happening. For the first time in decades, there is a lot.
Senior Vice President Research