Flexed Pricing

Flexible pricing involves more than slashing a buck off here and there. Competitive pricing offers many financial benefits and can reduce order-management costs dramatically.
Posted February 1, 1998
By

Emily Kay



In this article:
AT A GLANCE: Camelot Music
TOOLKIT: Where To Go For Flexible-Pricing Software
Enterprise Resource Planning Market Table
When you're playing on the same field as Best Buy, your pricing had better be competitive. That's especially true if you're a smaller specialty establishment in a shopping mall where walk-in traffic can just as easily walk out if your next-door rival offers better prices.

Charlie Marsh, CIO of Camelot Music, uses IT to tailor his company's pricing structures based on region, store, competitive situation, and individual customer.
Photo: Bruce Zake/Mercury Pictures

Charlie Marsh, CIO with Camelot Music, a mall-based retailer of compact disks and cassettes in North Canton, Ohio, knows that only too well. To Marsh, competitive pricing involves more than slashing a buck off a CD here and there. To vie effectively with retailing giants and other mall shops, Marsh uses information technology to tailor Camelot's pricing structure according to region, store, and competitive situation. Camelot also awards discounts to frequent customers.

Camelot isn't the first company to use flexible pricing. Supermarket chains and consumer-packaged goods suppliers, which deal with far more price points, rapid pricing, and promotional changes than other industries, have led the way in using variable pricing. Other industries also use automated systems to help manage inventory and improve marketing initiatives through flexible pricing. They're doing so through software that assigns variable price tags to the same merchandise according to who's doing the purchasing and when, the quantity of the items wanted, where the customers are doing the buying, and myriad other variables.

AT A GLANCE: Camelot Music

Company: Camelot Music, based in North Canton, Ohio, is a privately held mall-based retailer of music CDs/cassettes, with 5,000 employees and 310 stores in the United States.

The problem: Remain competitive with larger retailers such as Best Buy and Circuit City, as well as smaller mall-based stores, by offering pricing schemes that vary by store and competitive situation, and discounts to frequent customers.

The solution: Use variable-pricing software and sophisticated marketing methods to attract and retain customers.

The IT infrastructure: Richter Systems International's Automated Merchandising System runs on an Hewlett-Packard 9000 T600 server. Camelot's data warehouse runs on an ICL GoldRush MegaServer massively parallel processing database platform, Informix Dynamic Server database, and Micro Strategies DSS Server relational OLAP server.

Costs of technology to solve business problem: Between $750,000 and $1 million.

ROI/paybacks: Objective is to increase sales by at least one-tenth of 1%, which would garner a payback in a little more than two years.

These systems offer many financial benefits and can reduce order-management costs dramatically. In fact, there's a widely held belief that companies must implement such systems just to remain competitive. Many companies deploy variable-pricing software as part of larger supply-chain management systems, although enterprisewide systems take longer to build than those set up to deal strictly with pricing. But despite the costs involved, many companies measure the payback period in months, not years.

Experts anticipate that the use of such systems will grow, especially as more companies conduct business over the Web. Although analysts maintain no growth figures specifically for variable-pricing software, the market for supply-chain automation, which includes such packages, is strong and growing. Sales of these systems will burgeon from about $1.5 billion in 1997 to $8.5 billion by the year 2001, according to Dennis Bryon, vertical industry applications research manager with International Data Corp., a market research firm in Framingham, Mass.

Consistency is crucial

One key to success in variable pricing is enterprisewide pricing uniformity, no matter which technology or approach a company chooses, says Judy Hodges, IDC's applications and information access research manager. The need for consistency is a major reason that Camelot Music picked the Richter Automated Merchandising System (RAMS) from Richter Systems International of Dunwoody, Ga.

In the past, Camelot executives worried little about Best Buy, Circuit City, and other mass-market retailers, which sold few of the music CDs and cassettes that are Camelot's bread and butter. About three years ago, however, the rules of the game changed. Best Buy began selling music recordings as a "loss leader," charging consumers $2 to $5 less than shops such as Camelot in order to attract consumers to higher-ticket electronics products. The retailers' strategy "drove 10 points out of our margin," says Marsh.

With the big retailers changing the competitive field, Camelot had to reinvent itself and offer better pricing just to stay in the game. Basing pricing on whatever criteria is appropriate--competition within or outside a mall, as well as no competition in some regions--was key. "We might price a CD higher than others, but if it's 50 cents instead of $1 higher, someone might not make two stops," says Marsh.

Camelot installed RAMS, which runs on an HP 9000 T600 Enterprise Server, for more than its pricing capabilities, but Marsh appreciates those capabilities. "It was not our intent to buy a system because it has variable pricing," he says. "But the system we have now has that flexibility so we use it."

Camelot also operates a sophisticated customer marketing system, which runs on data warehousing technology from ICL, based in Reston, Va. As part of ICL's Corema consumer relationship marketing solution, Camelot's "repeat performer" program encompasses 2.25 million names of frequent buyers, to whom Camelot issues $5 coupons good toward purchases on their next store visit. "It's like an airplane frequent flyer program," says Marsh.

Corema manages customer loyalty schemes, manages and monitors promotions, and supports sophisticated predictions of customer purchase patterns. Camelot integrated Corema into a data warehouse, which enables Marsh to perform various market basket analyses, including calculating the success of regional promotions by costs and margin percentage increases. The warehouse runs on an ICL GoldRush MegaServer massively parallel processing database platform, Informix Dynamic Server database, and Micro Strategies DSS Server relational OLAP server. Both the Richter and ICL systems cost Camelot $750,000 to $1 million to implement, including integration help from ICL.

Quick payback

Payback from the ICL system, which Camelot deployed in mid-1997 after nine months of development, should be quick. If the frequent buyer program increases sales by one-tenth of 1%, the system will pay for itself in two years. Marsh expects even more of a sales boost than that from 100,000 Christmas mailers he sent out in early November. In an earlier test, within 30 days of mailing a 10% discount coupon to about 6,000 names, more than 70% of those customers had returned to the store, and the average purchase per customer had almost doubled what it normally was. Within two months, more than 90% of customers had come back to the store, with the same purchase pattern.

TOOLKIT: Where to go for flexible-pricing software

Companies use a variety of tools to implement variable-pricing functionality. Here are a few examples:

Enterprisewide packaged apps

Baan's Baan IV
http://www.baan.com
415-462-4949;
908-544-2850 outside the U.S.

Industri-Matematik's (IMI) System ESS
http://www.im.se
914-333-1500

PeopleSoft's PeopleSoft 7
http://www.peoplesoft.com
510-225-3000;
888-773-8277

SAP America's R/3
http://www.sap.com
610-725-4500;
800-727-5872

Supply chain management

i2 Technologies' Rhythm
http://www.i2.com
214-860-6000;
800-800-3288

Manugistics' Manugistics5
http://www.manu.com
301-984-5263

Product configurator

Trilogy Development Group's SC Pricer
http://www.trilogy.com
512-794-5900

Retail automation systems

JDA Software Group's Open DataBase Merchandising System (ODBMS)
http://www.jda.com
602-404-5500

Retek Information Systems' Retek Merchandising System
http://www.retek.com
612-630-5700;
888-617-3835

Richter Systems International's Automated Merchandising System (RAMS)
http://www.richter.net
770-395-9068

Contact managers

Symantec's ACT!
http://www.symantec.com
541-334-6054;
800-441-6054

As Camelot's experience shows, flexible pricing lets companies cut costs, hike profit margins, and boost the proficiency of managing sales transactions--all while rewarding favored customers. Campbell Soup, a $7.7 billion food company in Camden, N.J., has accrued huge savings since implementing System ESS from Tarrytown, N.Y.-based Industri-Matematik (IMI) in 1995. As part of an operational overhaul aimed at improving customer focus, IMI saves Campbell $15 million to $20 million annually due to improved efficiencies in customer order management, pricing, and promotion activities, says Paul de Janosi, a partner with market research firm Benchmarking Partners in Cambridge, Mass. Shorter order cycle times, more accurate invoicing, better control of trade funds, and reduced customer deductions save Campbell big bucks, notes de Janosi, who served as Campbell's global logistics systems director until two years ago.

IMI's software enables Campbell to determine profit margin based on specific discounts and promotions, to identify the best choice of distribution center, and to produce correct and consistent invoices. Campbell strives for 90% invoice accuracy and achieves better than 80%. That's far better than the 40% accuracy rate the company had before installing IMI, says de Janosi.

So what did Campbell have to spend for such dramatic results? The company invested more than $25 million and 30 months to implement System ESS, but it can now offer a variety of discounts to its customers. Stop & Shop, for instance, could obtain a reduction for buying more than 50 cases of Vlasic Pickles, while The Kroger Co. might get discounts based on purchasing cases of chicken noodle and tomato instead of just one type of soup.

Change is the only constant

For companies as diverse as Camelot Music, Campbell Soup, and Boise Cascade Office Products, the need to manage shifting prices is a constant. At Boise Cascade, prices change daily for the 12,000 most frequently ordered items in the company's on-line catalog. The $2.8 billion office merchandise distributor sells everything for the office--from pens and pencils to computers, software, and specialty items--on a contract and noncontract basis, says Laura Longcore, Boise Cascade's senior manager of electronic commerce, based in Itaska, Ill. "When you're selling hardware and software, pricing changes all the time," she says.

The complexity of providing flexible pricing for 1,100 large on-line customers required Boise Cascade to build its own Web-based variable-pricing system. The type of relationship Boise has with its buyers determines what it charges. Off-contract rates involve variable pricing in many forms, including discount from list; cost-plus; column pricing, in which a certain percentage of margin is based on volume; and merchandise category pricing, in which different products produce different margins.

Internal development was Boise's only choice back in January 1996, when the company began investigating the construction of a business-to-business commerce system that could meet its customers' requirements. "It's customer driven, so we have all kinds of crazy pricing schemes," says Longcore.

Development started in June 1996 and Boise's site went live seven months later. Per their demands, Boise's internally dubbed "I-97'' Internet commerce application lets customers determine who in their firms will order products.

The Internet server application runs on a Sun Microsystems Ultra I server and Oracle relational database. ECXpert software from Actra Business Systems links I-97 to an IBM 3090 host system, where product and ordering information resides on IMS and DB2 databases.

All processing takes place on the mainframe. Customers using any popular Web browser log onto the company's home page by entering a user ID and password. Once in, they can scan an on-line catalog. The system knows who's making the buy and what he or she is allowed to buy. A customer can also set a purchasing limit, after which the system will process no more orders submitted by that company.

Of crucial importance to Boise is the consistency with which its 44 U.S. offices provide pricing plans. "If AT&T wanted to know what pricing is in Los Angeles and New York, we can do that because we run off one system and one set of databases," says Longcore.

Longcore won't divulge total system costs, but puts them at "several hundred thousand dollars," including hardware, software, and outside consulting. The system paid for itself in less than six months, and Longcore estimates it will save Boise about $1 million this year by cutting the time customer service reps require to process orders. Financial gains include savings of 45 cents for every line item on an order entered electronically instead of phoned in or faxed.

Clearly, the more complex corporate relationships with customers become, the greater the demand will be for flexible pricing. "Fifteen years ago, 80% of transactions were standard and 20% exception based. Today that percentage has flipped," says Sameer Dholakia, SC Pricer product manager with Trilogy Development Group in Austin, Texas.

Henry Bruce, worldwide marketing vice president with IMI, confirms that variable pricing is a critical strategic lever. "It's not a question of whether you offer variable pricing, but of how easy it is to implement," says Bruce. //

Emily Kay writes about technology as a principal with Choice Communications, an editorial consulting firm in Chelmsford, Mass.

Enterprise resource planning market

No one tracks the flexible-pricing software market per se. To gauge its size, here are statistics on the size of the total ERP market and the submarket in scheduling and planning software. Flexible pricing is a smaller segment of scheduling and pricing.

Year Total ERP market estimate % of market in planning and scheduling software Dollar amount in planning and scheduling software
1995 $6.2 billion 2.7% $171 million
1996 $8.1 billion 3.1% $253 million
1997 $10.5 billion 3% $318 million
1998 $13.6 billion 3% $410 million
1999 $17.7 billion 3% $530 million
2000 $23.0 billion 3% $690 million

Source: Benchmarking Partners







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