In many companies, the top management is dreaming of price optimizations that would magically set the right prices. At the same time, many pricing teams struggle to get the everyday pricing process to run at the required rate; the pressure to increase the frequency of price changes has risen significantly during the last couple of years. How can you create a modern price change process that fulfills this new requirement?
This short post will go through the six pillars of a pricing process and a system supporting it. Although pricing processes vary from company to company, it doesn’t matter whether you’re using cost+, historical, value, market pricing, or any combination of these; we can identify some standard requirements.
The six elements of a pricing process that we’ll discuss in this article are:
- Base Price Setting
- Price Book creation
- Price Book publishing
- Cost calculation
- Master Data Management
- Master Data Load
Base Price Setting
No matter what process and system you use for pricing, you need to set at least one price for every product as a base. When using rules-based pricing, this base price is then varied to different price books (or you may call them price lists as well) using price modifiers. Your pricing sequence can run up, down, or in both directions from this base price.
When setting the base, it’s vital to get strategic guidance that will help you get the price right. For example, you can use a side-by-side view of sales analytics data and competitor prices for the product and use simulation capabilities to identify the potential changes in sales based on the price change. Also, average and calculated cost information are needed to find space for additional price changes.
Price Book Management
The price book is the central location where you can set the final sales price for a region, country, or customer. The price book not only presents the price for the target audience but also manages the approved products for the channel, and many times it also addresses the presentation of the price list for the published price book.
Currently, most pricing processes already use some rules that derive different prices from the base price. Also, a tracing capability that enables an insight into how the price was derived is vital, as well as warnings if any rules are not set up correctly.
The whole pricing sequence, a waterfall of price values, which helps you to compare different products, and sales statistics for a given region or customer are necessary inputs when verifying that the price modifiers produce the optimal price.
Bundled and configurable products represent another dimension that needs to be managed, often making pricing more complex. Components can be sold as-is or within a bundle or a configuration. Therefore, you need to consider how to vary the price in different contexts.
Campaign management and promotion creation are separate processes from price book management. However, systems would still need to provide visibility to each other to avoid conflicting messages on pricing, such as a change of sales price and promotion price during the same day.
Price Book Publish
A reliable pricing system with a review and approval process for final price changes eliminates most pricing errors. Also, in a dynamic rules-based system, it’s advisable to set the published price as a static value. Price Book Version management helps you to create new prices from a previous version and change the price modifiers only for that version.
Generally, it’s still good practice to publish a PDF version of the price book, in addition to online access to the prices. You can distribute the published prices from the price management system to execution systems like ERP, POS, and eCommerce in various ways, like CSV or Excel files or using direct API access. The chosen method depends on the targeted level of automation.
Master Data Management
Pricing often requires particular product attributes unavailable through the Master Data Load (see the next section). These attributes could be related to, for example, pricing rules or how the product is presented in the price book. Also, the product descriptions may not be the ones shown in the price book. Product categories are often used as a base for category pricing, but they may also need some fine-tuning related to pricing.
Currencies, customers, and suppliers are master data elements also needed in the pricing system. However, some data elements, like price books and price book versions, may be required only in the pricing system.
Master Data load
Depending on the sophistication of the company’s data warehouse or data lake practice, loading master data into the pricing system may produce some challenges. A good practice is first loading the data into the staging area, where it can be verified, merged, and cleaned. After this step, the data is published into the master data tables.
This process can be done as file exports from ERP, PIM, BI, and other systems. Still, a direct API load using a middleman to process the data transformations enables to build fully automated loading and provides more up-to-date data.
Cost calculation is optional in many cases. You may already get the average cost or prices directly from the suppliers. When you need to calculate the cost from materials, work and related components, a tight integration to the pricing system provides a smooth transition from costs to price book versions. Then, you can see a more accurate margin for products in the base price setting and price book management views.
Product costs should be built from the component costs. The components can then be reused in multiple products. The cost calculation needs its own rules and a calculation sequence that is separate from the price calculation. For example, exchange rates need to be supplier-specific rather than customer-specific, as in price books.
A reliable dedicated pricing system enables smooth management of all six elements of the pricing process. This system enables more frequent pricing changes, so your prices follow market changes more closely. The system also works as a baseline for more intelligent price optimization. You should not implement price optimization without good capabilities to execute price changes – especially now when the prices fluctuate frequently and create significant challenges for optimization algorithms.