Transforming Banks for a Digital Future: The Winners, The Losers, and the Strategies to Beat the Odds
DHL Worldwide, for example, is using customer data and new price analysis software to boost revenues on express-shipping services. "Before, five out of 10 calls to our call center actually booked shipments, so our goal was to improve that to eight out of 10," says Aman Adinew, senior manager of pricing and yield. Armed with customer data, call-service reps were able to tailor prices to individual customers. The result? Shipping revenues are up this year by at least 10 percent, Adinew says.
Ford Motor Co., meanwhile, also is reaping benefits. According to a McKinsey study, Ford expects its digital pricing strategy to significantly improve the yield from the nearly $10 billion it spends annually on promotional pricing. Historically, discount financing and cash-back offers were broadly offered to every customer over a given period of time. The Net, though, is enabling Ford to better track individual customer behavior, and let the company more finely target tailored promotions to specific groups of people. "Differentiating price to target various groups is hard to do offline because visitors to a physical store are a statistical mystery," says McKinsey's Zawada. Online, though, once a customer's segment is identified, a segment-specific price or promotion can be offered immediately, online and off.
But it's not simply about cutting prices to move products. It's also about pricing your products to reflect their different values to different customer groups. And in some cases, that can mean charging more. "Most people think of low price, but it's also about capturing the full perceived value of your product," says Glazer.
In fact, many companies routinely underprice their products, says Robert Drescher, former CEO of Optivo, a San Francisco-based maker of pricing software that closed its doors in October, partly due to its over-reliance on struggling dot-coms as clients. Drescher remains a digital price-strategy believer, and tells of a consumer electronics firm that used Optivo software to test prices for a camera it sold online. The company's two competitors had the same camera priced at $499 and $429 on their Web sites, and its reaction was to match the lowest offer. But the camera cost the company $416, so margins were painfully small. After using the pricing software to test demand for the camera at various prices, the company settled on a price of $479and the impact was significant. Although there was a drop-off in volume, overall sales increased threefold and profits went up fivefold. "Knowing the trade-off between price and quantity allows you to make these decisions," Drescher says.
In the financial services market, where smart pricing is an imperative, credit card pioneer Capital One continues to show the way. It built the firm on technology that can identify the most profitable customers, and then tailor prices to reel them in. The Falls Church, Va.-based financial services firm attributes its 30 percent a year average earnings growth to its information-technology strategy, which exploits the Internet and data mining to respond to changing market conditions and demand. Capital One continually tests the market through mailings and Internet offers to find the right mix of rates and features to appeal to various customer segments: The company is known to conduct more than 64,000 tests a year. On the Internet, the company can analyze a prospective credit card customer and make them an offer in less than 30 seconds. That has helped the company gain some 2.5 million online accounts and add 43 million customers since 199510 million last year alone. Capital One's earnings grew 30 percent in 2001 when most companies were struggling to achieve flat results.
To be sure, Capital One is on the cutting edge of the fledgling pricing revolution. True one-to-one marketing, where companies can tailor prices and promotions and configure products for specific customers at specific times, is still a long way off for most firms. But it's clear that companies married to a conventional view of pricinga sticker price that doesn't change in response to market conditions or business goalscould be at a distinct disadvantage down the line. Says the Pricing Society's Mitchell: "Everyone's done everything they can on the cost side to ride the recession; now they're looking at the top line."
The growing interest in digitally driven pricing strategies can be seen in the surge in new price analysis software companieswith names like Zilliant, KhiMetrics Inc. and ProfitLogicthat promise to help companies reap more profits through pricing. Membership in Mitchell's organization has been growing 25 percent annually and now counts 1,000 members from 400 companiesincluding pricing executives from such companies as Dell Computer Corp. and Capital One.
Indeed, strategic pricing is built on good information and good information systems. "Wal-Mart set out to build a computer, not a store," says Glazer. "Kmart's demise is really a reflection of Wal-Mart having better information and using it to be smarter about pricing."
That's why pricing now demands the CIO's attention. Because pricing systems must be integrated with traditional ERP systems and supply chain software, "you want to get the CIO involved," says Mitchell.
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