How to Reap the Benefits — and Overcome the Challenges — of Pricing Software Implementation

Implementing the right pricing software can help you advance along the pricing maturity curve and boost bottom-line profits. Just make sure you understand where the landmines are along the way.

Pricing is an incredible — but extremely underutilized — tool. Done correctly, it can lead to an increase in bottom line revenue of anywhere from 2% to 10%, and often even more. At BCG, we have benchmarked our clients along a pricing maturity curve. It distinguishes five levels of pricing maturity from reactive to foundational, scientific, strategic and, ultimately, dynamic. For anyone who has traveled on an airline in the past 30 years, it should come as no surprise that the travel industry in general, and airlines in particular, is the highest-rated industry group along the pricing maturity curve. They charge variable prices for their seats depending on market and time of purchase, and have introduced a wide range of ancillary items available for purchase from the time you book through the end of your flight. By comparison, other companies are very far behind in the pricing game.

Our experience at BCG shows that while the vast majority of industries have progressed beyond the reactive stage, most fall somewhere between the two lower levels of pricing maturity — the foundational and scientific levels. That is good news in the sense that it highlights these companies’ commitment to pricing. It does, however, demonstrate that there is still a lot of ground to cover before these industries reach the pinnacle of pricing maturity and attain dynamic pricing. In this blog post, I will share how you can move your company up the pricing maturity curve and become more successful at pricing your products and services.

The Requirements of Successful Pricing Software Deployment

One of the levers that companies are increasingly investing in is pricing software. Before joining BCG GAMMA, I was fortunate to be a part of the pricing team at PROS, which helps companies compete better in the digital economy through the use of AI and machine learning software for pricing. At PROS, and throughout my career, I have helped a number of companies institutionalize their pricing. In the process, I have learned that while pricing software deployments can boost the bottom line, they can also be spectacular failures. Typical problems range from poor pricing recommendations, to insufficient integration into a company’s IT systems, to letting brand new top-of-the-line pricing software sit unused. Rather than discuss how such failure can happen, I’d like to focus on the top three factors that drive pricing software implementation success:

1. Securing senior leadership buy-in
2. Reviewing and adjusting processes and governance
3. Gaining awareness and mastery of general technical constraints and limitations

Let’s examine each of these factors in greater detail.

Gaining Senior Leadership Buy-In

Organizationally speaking, pricing is typically led by a single function within a company. Often, marketing owns the pricing function, with some exceptions where other groups lead the pricing effort. But pricing affects every aspect of your company: If you were running an airline and changed prices in a specific market, the change would affect demand in that market, which, in turn, would directly affect scheduling, operations, marketing, and other key organizational functions. If you were selling consumer goods packaging, changes in your pricing would affect volume and, consequently, production levels. Even in industries where demand is not overly responsive to price changes, pricing changes will still affect numerous parts of your global organization (think of the demand for energy or gasoline: it is relatively price inelastic but changes in price affect, among others, the marketing and procurement departments of energy retailers and oil companies),

These changes will ripple through your organization. Without a unified strategy for managing these changes, the entire company can suffer. If incorrect pricing, strong competition, or other market conditions lead to weak demand for a specific airline’s seats, it could trigger a vicious circle in which:

1. The Revenue Management department increases the availability of low-price point seats, thereby lowering the market price of those seats.
2. In the meantime, the Scheduling team reduces flights in the affected market, thereby reducing capacity.
3. To generate more sales, the Pricing department lowers the actual price points, which further reduces prices.

Basic economic theory tells us that combining these three actions can only lead to disaster. The role of a unified strategy — and of buy-in from the global organization — is to implement new pricing strategies that don’t lead to these kinds of cascading, unintended consequences. Senior leadership needs to be fully engaged in pricing software implementation, and in pricing transformation in general, to avoid these negative outcomes. Doing so will ensure that all teams are aligned and aiming for a common goal of pricing success, and that the right course of action will be undertaken when hitting roadblocks.

Reviewing and adjusting processes and governance

Another very important aspect of a successful pricing roll-out is a thorough review of processes and governance. Most pricing software solutions come with some form of approvals and escalation processes built in. However, having the ability to introduce or apply governance processes within a software solution does not necessarily ensure that (a) those processes are sound and will add value to your organization, and (b) that these processes will be enforced and followed by your pricing team and adjacent functions.

I recently worked with a large packaging company that followed one of the most complicated pricing processes I have ever encountered. The complexity of the process was partially the result of the innate complexity in their business. But it was also due to significant fragmentation in their approach to pricing — an approach that was the result of years of suboptimal management. The company’s quoting time could take as much as 90 days, and this length of time was not an outlier: It was routine. The quoting time took so long because of the numerous touchpoints required to generate a quote. First, the sales team had to initiate contact with the customer, take delivery of high-level specs for the required product, and then pass on these specs to their pricing counterparts. Next, the pricing team had to review the requirements and, usually, return the request to sales for additional information. After a number of such back and forth exchanges, the pricing team would finally possess all the information it needed to price the requested product — provided the product already existed in the costing database and had been produced before. If not, pricing would reach out to the production team, have them review the requested item, and propose one or more actual products, whether existing or new, that would meet the specification requirements. This process alone could take weeks to complete.

At this stage, the information would come back to the pricing team, which would leverage cost information from historical information to provide a price. Once again, if cost information was not available, the pricing team would have to reach out to the finance team to get cost estimates for the new parts. Multiply this ungainly process by the hundreds of products for each customer, and once again by the thousands of customers, and it is clear why the company’s pricing took so long.

This level of complexity does not even take us to the actual approvals piece. But it does highlight how complex even the pre-approval portion of a pricing process can be. In this context, it is of paramount importance to have a very clear path for simplifying the end-to-end pricing process. The following steps to that end apply to packaging companies — but could be adapted to apply to other industries as well:

1. Ensure high-quality data flow from sales to pricing to cut down on the back-and-forth process this one company was using to obtain complete specs. Improved data flow can be achieved through the use of pricing software, which enables users to fill in detailed forms that have limited room for error.
2. Provide a more robust costing process for the pricing team, one that leverages product and feedstock hierarchical information to quickly find similar materials that can be used as proxies for unavailable information.
3. Rely on the production team for exceptions only.

In general, this same approach should be a part of any pricing software implementation or pricing transformation.

My main point is that to ensure success it is critical to think through your company’s processes in the context of your chosen pricing solution — and vice versa. Furthermore, it is very important to acknowledge that a successful pricing software implementation will require choosing the solution that most closely matches your needs. This choice should be made with the full knowledge that, even in the best of cases, you will very likely have to adjust your own processes to meet the solution halfway — if not even further.

In our packaging business example, the company had implemented a pricing software tool before we started working with them, but that solution had fallen victim to one of the three common failures: It was not being used — for two reasons. First, the solution did not fully meet their needs. Second, the solution did not work across the four different Enterprise Resource Planning (ERP) systems the company was using. This made it virtually impossible to use the pricing tool when a customer needed items across different ERP systems. In short, the pricing solution could not replicate the company’s existing processes. Since the company chose not to adjust its processes to enable efficient interaction between multiple systems, the pricing solution would have created too many technical challenges to make it practical (which I’ll share more details on, next…).

Gaining awareness and mastery of general technical constraints and limitations

The last and equally important area to contemplate when considering a pricing software implementation is that of technical constraints and limitations. I have frequently encountered companies who either ignored such constraints or were convinced that they would be able to overcome them during the implementation phase. This is a particularly unwise oversight for companies that have grown through mergers and acquisitions. This kind of growth can often leave companies with a legacy of multiple backend systems, including multiple data warehouses running different technologies, different CRM solutions, and different ERP systems — none of which may play well with the others.

Successful pricing is a global function, requiring information from across the organization, without being limited to a subset of company data. A prime requirement for this degree of data exchange is the standardization to backend data systems. Lack of such standardization impedes not just pricing software implementation, but a host of customer-facing capabilities.

You can improve your chances of a successful technical roll out of a pricing software solution by:

1. Setting a path to create common backend systems across your entire organization — well before you embark on a pricing transformation. If you plan to both implement a pricing solution and standardize your backed solutions at the same time, make sure that you have a plan to roll out your pricing solution in phases that correspond to the planned backend standardization. Always have a backup plan.
2. Finding a provider that will work with you to bring in the data from all your different sources if you cannot commit to standardized solutions. Be prepared to invest considerably more, both on the people side and the financial side.

Reflecting back on the maturity of pricing in the travel industry compared to other industries, it is clear to me that one of the driving factors of this industry’s success has been how standardized the travel industry is, relative to all other industries. Airlines, hotel companies, and travel companies in general have matured a great deal from the green-screen systems of the early 1960s. Since the ability to travel across airlines has always been an industry requirement, this advanced level of maturity has almost been baked in from the start. This requirement, and the ubiquity of Global Distribution Systems (GDS), have been major driving forces pushing industry standardization for decades. Even today, it is exceptionally easy to purchase tickets that combine travel on a major international carrier with more obscure regional carriers. In most cases, the traveler will even be able to have their bags connect automatically between these carriers without them having to retrieve their luggage at their connection point. We take this level of ease for granted, but it takes immense standardization to pull off.

On the downside, this high degree of standardization has also led to a much slower-moving industry. It has taken years to make it possible for airlines to sell ancillary products such as preferred seats and checked baggage across carriers. This cross-carrier functionality is finally starting to come online thanks to the International Air Travel Association’s (IATA) New Distribution Capability (NDC) standard, which effectively requires all travel companies to follow the same approach to selling ancillaries. This is a discussion for another time, but it highlights the importance of standardization and the immense value it brings to software implementation.

The point is that standardization is critical to the success of your pricing solution. Without it, you will be at the mercy of your software provider to offer a universal cross-platform solution. Generally speaking, such solutions are rare. If they are available, they typically involve such levels of complexity that the resulting pricing solution is exceedingly difficult to implement, maintain and use from day to day.

How do you ensure that you have a successful roll out of pricing?

To successfully implement pricing software solutions, you must first make sure an opportunity for pricing improvement exists. To this day, I have yet to encounter a company whose pricing is perfect and cannot be improved to result in at least a 2% improvement in bottom line. To know if these opportunities exist, you must address a few basic questions:

• Do you understand your market well?
• What are the competitive pressures?
• How are you pricing today, and is it the right strategy?

These are just some of the questions you need to address before you set the overall path to improved pricing.

You must also begin the process by securing buy-in at the highest levels of your organization. As noted above, this support will guarantee that when you hit roadblocks (which you inevitably will), your entire leadership team will be there to back you up and provide you with the resources you need to remove these barriers to progress.

And you must plan for success early on, account for the technical challenges discussed above, and think through how your governance must change to match your new pricing model. This step also requires the creation of a dedicated team that will support your transition to the new pricing environment. It should be an internal team whose sole focus will be on rolling out your new pricing solution. This internal team can be supported by an external group of experts who can provide guidance into industry best practices and pitfalls to avoid. Even though your pricing function may be owned by a specific department within your organization, input will need to come from across the organization. As such, the pricing implementation team will need to be cross-functional, drawing input and support from beyond the group that will “own” pricing in the future. As you plan for success, plan for contingencies as well. In a perfect world, you will not run into unexpected surprises as your roll out your pricing solution. Even so, it’s always a good idea to be prepared for the unexpected.

A critical step, of course, is choosing the right pricing software provider. At this stage, you are looking for a pricing solution provider suited to your specific needs. Beware of “Swiss Army knife” solutions that purport to do everything. While they may well be able to do all the things they claim, the fundamental question is whether you actually need that level of complexity, and whether it would actually help you reach your goals. Think of the percentage of features that you use in Excel today: Do you need that many features in your pricing solution? What can you live without? If your solution lacks these features, will your users have a worse experience — or a better one? What is your provider’s path forward? Is its roadmap relevant to you, or will it be focusing on industries other than yours?

Pay attention to your IT requirements as well. In this day and age of SaaS solutions, IT leaders tend to default to very high service-level requirements. Before you commit to a specific service level, ask yourself: Do you really need millisecond response times to a pricing request? Do you need 15-minute response times to technical problems? Consider balancing your SLA requirements with the software offering and how it matches your needs.

Last but not least, you should address the issue of whether to build your own solution or contract out. This is not an easy question. In my experience, outsourcing is usually the easier and more robust path to take, but each company’s situation is different: There is no one solution that fits all situations.

The Key Components of Success

Pricing software implementation should bring a significant improvement to your company’s bottom line and help you guide your company along the pricing maturity curve. But… there are no guarantees. The road to better pricing is paved with companies that got off course due to poor pricing recommendations, insufficient integration into existing IT systems, or the purchase of what would turn out to be very expensive shelfware. Getting this implementation right requires the fulfillment of three key components:

1. Senior leadership buy-in to push the entire organization forward and overcome roadblocks throughout the project.
2. A cross-functional team fully dedicated and committed to the project to ensure that the appropriate level of planning is done, that the right pricing software solution is selected, and that the company’s processes are on course to intersect the path of the chosen pricing solution.
3. A clear understanding of current and future technical challenges of successful pricing software solution implementation, an approach to overcoming these challenges, and a clear understanding of the importance of backend standardization.

If you can make these three components happen, you are well positioned to reap the benefits of your pricing solution for years to come.