April 23 2003
new era of Web-based Prices systems
to grow up margins
The idea is simple: There is a perfect price not only for each product, but a price for each item, this day and even every hour.
SAP, but also startups as DemandTech and ProfitLogic offers such Web-based analyses systems that sift through massive databases available on a corporate Intranet. These are crammed with up-to-date information about orders, promotions, product revenues, and stock levels in warehouses and stores.
Usually, all these elements are spread among hundreds of spreadsheets, hard to combine fully with the needed efficiency.
And this is just the beginning of this new variable prices era.
Indeed, with the arrival of new electronic gadgets such as electronic shelves and digital price labels, retailers will be soon able to change their prices more easily and quickly. They will also be able to send instant messages on shopper's carts for custom-made deals.
Of course, smart pricing systems need to be used cautiously on a marketing point of view as you can also generate backlashes as Amazon did two years ago when its customers realized that there were different prices for same items in different markets. Amazon has had to stop the experience after just 5 days... and get back to fixed prices.
This explains why many companies are still treading carefully.
In fact, the key is the quality of the marketing message. Instead of let the customer think that variable prices are like a "punishment", you have to show them on the contrary as a reward for good behaviour.
Low cost travel companies do exactly the same without any problem. They just tell you that if you are able to book your flight soon enough, you will pay less.
But let see some examples to illustrate the interest of these new Web pricing systems.
DHL used since long an unscientific approach of price fixing. The harsh fight with FedEx and UPS rivals was scaring the company to rise up its prices, on the contrary. The only problem when you want to lower your prices is by how much?
To resolve this problem, DHL turned to the Web pricing tools and decided to use software from Zilliant Inc. In a single database DHL loaded in different test prices for different routes and weights, including those of competitors.
The system tested the market by offering cold callers different prices. It learned that way how low prices could go and still make a profit.
Now, DHL turns 25% of cold callers into customers, up to 17% before. This cold calls segment makes up about 15% of DHL's business (13.2% before) and gross margins have jumped 5.4%
The DHL's software system has been set up in just a few weeks for a few million dollars. However, if prices for such systems are beginning from about three million dollars, they generally need a twelve months average installation.
Other big companies have turned to Web pricing tools as General Electric or Hewlett Packard.
The HP's problem was different from DHL: How to manage the transition from one generation of HP's heavy-duty Unix servers to the next as demand drops when the new ones approach the market.
With a pricing system that analyzes market trends, HP can now calculate when to start discounting the old ones and by how much. The idea here is to attract new clients by lowering prices earlier while old models are still on sale than to slash prices when nobody will want to buy them anymore.
The system has helped HP to rise up its sales by 1 to 1.5% on this single segment in early 2002.