10 Questions for Price Optimization Experts Vendavo

Updated: June 26, 2009

Introduction

Pricing in B2B sales situations is something many companies either take for granted or view as an area where sales needs latitude to sell. Vendavo, a Palo Alto-based company, looked at this area in a fresh, but perhaps not exactly new, way: It applied some best practices to pricing and factored in elements that could help determine the optimal price on a customer-by-customer basis, such as, regions, channels, segments and functions, including sales, production, finance, operations, marketing and executive management. In other words, Vendavo weighs factors and provide visibility into pricing in a manner that companies ought to but, because of the complexities of business, don't have time to do. The result is the company's price optimization and management software.

Technology like this needs someone who can tell its story; in Vendavo's case, its founder and executive vice president of marketing and business development, Jamie Rapperport. Rapperport cut his teeth in technology in management positions at Lotus, Sun Microsystems and Approach Software before founding VXTreme, a streaming video technology company that was acquired by Microsoft. His years of watching the balancing act sales and finance perform over pricing inspired Vendavo.

Rapperport spoke to Focus about rationalizing pricing, how it relates to CRM and what price optimization and management software mean for sales reps.

Interview

Focus: Pricing is something a lot of companies take for granted once it's established. But clearly, you've spotted a strategic value in applying some additional intelligence to the process. Can you explain Vendavo's value to your customers?

Rapperport: First, we do pricing for business to business companies. For a large business to business company, pricing is very complex. You end up with multiple divisions or business units [using] different channels, different segments, then you also have different roles in the organization engaging around it — sales, finance, marketing, executive management. What Vendavo's solution does is, given that complexity, let you make better pricing decisions and improve the profitability on the deals you are doing. So, when you look at specifically how we do that, there's a set of elements. Number 1, we let you segment your market and your deals in an effective and intelligent way. We let you set and optimize prices and terms for each of the dials that you do. We help you manage complex price lists, policies and approval structures. We help you negotiate the deals themselves and give you the ability to negotiate more profitable deals. And we do all those things within an integrated enterprise system. We get rid of the need for a set of one-off systems. In a deal with a customer, you would have the profile of that deal — that means the customer, what they're buying, and any other relevant deal elements. You'd have a target price and that target would give you as the salesperson guidance on how to price that deal. You would then also have a deal score that may look at profitability or volume, or often some combination of metrics. Whether or not you achieved that target price, you would be negotiating with a sense of how well or not well you're doing in that negotiation. And then you'd have a view of the different price-related elements that might impact that deal. An example would be that you were deciding whether to charge for freight on that deal. That has profitability impact for the company, and we show that as one of the deal elements. Another might be whether or not to give a volume rebate. Another one might be whether to offer special payment terms. In general, business-to-business companies have many of these price-related elements. And they're often ignored in the course of negotiating the deal. We allow you to do deals with these multiple elements in place: target price, a deal score and intelligent target and visibility into each of the relevant price relate elements of the deal.

Focus: You're providing visibility across the board so the people making these deals are not guessing at what would be profitable and what would not be, what's effective and what's not, and they have all that at their fingertips even before they start talking to customers.

Rapperport: They have that view even before they sit down with the customer, based on the volume that customer may be asking for, the history of profitability with that customer, whether that customer has lived up to his volume commitments or not. Rather than shooting from the hip about the customer's situation, you're sitting down with a much tighter view of what the parameters would be for that deal.

Focus: How do you address the need to come up with pricing that works for both the buyer and the seller?

Rapperport: If you don't have that visibility I just talked about into specific individual elements in a deal, you essentially end up pricing by the averages. A large portion of your customers might get one price, and that price then would vary based on the salesperson's discretion and nothing else. It wouldn't vary based on how expensive it is to service that customer, it wouldn't vary based on whether that customer has historically lived up to their volume commitments or any of these other relevant items. Instead it would be an average price put forward by the organization and then salesperson discretion. If you think about that, that's not fair to the customers that on some level fall below that average for any of a number of reasons. Maybe the cost to service them as a customer is less than many other customers. Maybe they tend to get shipments in large quantities instead of many rush shipments of small orders. They may have fewer ship-to points than another customer that has lots of ship-to points. If you don't have that intelligent, granular, data-driven view of pricing, you end up pricing to the averages and that penalizes a whole set of customers who in one or more aspects of their business are below average and should be getting a better price. Essentially, it moves from a shoot-from-the-hip type situation to a knowledge-based approach, and that knowledge-based approach allows you to have a meeting of the minds with the customer that allows you to explain how you're pricing them and why.

Focus: How does price and price management affect customer loyalty?

Rapperport: A large portion of it is in having a fact-based and data-based discussion. It also brings forward the different elements of value that you as the seller are providing to the buyer, and lets that buyer then evaluate which elements may mean more or less to them. The buyer ends up having a dialogue around what value they're getting from your product or service or combination of the two and paying for the elements that they truly value. For example, if they're less concerned with you offering free shipment, then they're not paying for it, and they're feeling that they're in a situation where they're paying for what they're actually valuing. The first element of customer loyalty is getting away from a situation where a customer is looking only at invoice price. They're not recognizing a set of value-add services you may be offering, and they're not recognizing that that set of value-add services plays a role in price, whether it's part of the negotiation or not. You're then in a situation where you're going to lose customers if somebody else offers a lower invoice price, even if that competitor of yours is not adding certain value-add services. By unpacking that and pointing out to the customer not only invoice price but the set of value-add services you're providing around that, you can reach a point where, if the customer values those services, they're part of the deal and they help create customer loyalty. If the customer is not interested in those services, you can unpack them from the deal and have a lower invoice price as a result.

Focus: What advice would you give a friend who's trying to understand how pricing impacts his or her customers' loyalty and propensity to buy?

Rapperport: When we look at loyalty, you want to have high loyalty in your customer base, but specifically you want to have high loyalty for your high-value customers. When you think about loyalty, in some sense, it's not only a matter of the customer picking you, but it's also a matter of you choosing which customer to focus your resources on, give the best pricing to and generally develop. By having deep insight into what different customers are paying for your products and services, and what the net profitability is of those different customers, you're in a position to determine which customers might be high margin and high volume business and you want to retain and protect that business and potentially provide additional services to them which might be high margin and low volume, where you want to look at how you grow business with that customer. By the same token, there might be a set of customers that are low margin and low volume, and there you might be looking to upgrade the mix of what they're buying from you or how they're buying from you, or exit business with that customer. It gives you a fact-based way of not only increasing loyalty by having customers paying for what they value, it also puts you in the position of knowing which customers to focus your loyalty efforts on by understanding how profitable and strategic they are for you as a company.

Focus: Is there an ideal type of company or vertical market that can benefit from Vendavo?

Rapperport: We are 100-percent focused on business to business companies. When I say business to business, that includes high tech, manufacturing, mill products, coal and gas, distribution and it also includes consumer packaged goods. That's a business where you're selling business to business, then finally that goes through to an end consumer. If you look at all those companies and all those different industries, they all have share a number of things. They all have that pricing complexity I talked about up front. That complexity comes from some combination of the number of products they have, the channel complexity, the number of customers, the number of different elements in a deal, the number of people in their sales force. When we work with any given company, often they'll have lots of complexity on one or two or three of those dimensions; most of them don't have high complexity on all those dimensions, but they all have high complexity on at least a couple of those. So the short answer is the ideal company, we work with fairly large companies, generally $1 billion or more in revenue, and business-to-business companies that are that large will have that kind of complexity.

Focus: Does this replace the need for talent on the part of the sales rep in determining discounts during the sales process?

Rapperport: No! If you look at the role that discount discretion by the sales rep plays right now — let's say the sales rep has 15 percentage points of discount discretion in a deal — that essentially says there are some aspects of a deal that you don't know about until that sales rep sits down to negotiate with a customer, and therefore you need to give your sales rep room to move because there's things you don't know. What we would put forward is that there's an awful lot that you do know that you're not using. Sure, there's some amount you don't know, and some discretion that makes sense, but what you want to do is take all the information you do know about — that historical data, for example — and have a much more intelligent target price for that deal. Instead of a target price that's the same for some huge segment of your customers, have a target that's appropriate to that deal and then have small amount of discretion or a controlled amount of discretion around that. That's giving the salesperson a much better sense of where to focus, what to target from a price perspective, and it's giving them that information in a way they wouldn't have [it] if they were just walking in and shooting from the hip. They can't on-the-spot analyze all that historical data. So it's giving them that optimal target and it's giving them the appropriate amount of discretion to move around that particular deal.

I'd actually add one other element for the sales rep: the system puts in approval thresholds, so if a sales rep wants to discount more than a certain amount they need to get approval from somebody else in the organization. By having those approval thresholds in there, and having those make sense, intelligently set for a given deal, sales reps like that. If you think about a sales rep's position, they're selling both to the customer and they're looking for deal that's going to move through their organization rapidly so they can be responsive to that customer opportunity. If for example, they have the wrong price in a given segment that they're selling into, they'll have to be constantly seeking approval and that's slows them down. What they want is intelligent pricing for each segment of their business and to know where those approval levels are.

Focus: Are there any mistakes that sales organizations make when they perceive that price has leapfrogged to the front of the line in terms of importance for their customers?

Rapperport: It's interesting. You would expect that there were companies or companies under pressure that cut their prices in the face of a challenging economic environment. We're not seeing so much of that. I think most companies realize that you don't want to go in and cut prices in the face of challenges on the demand side. You want to instead keep extremely focused on margins and what part of your business is profitable business, and have a deeper understanding of, essentially, the value of different customers to you. So we're seeing a huge focus on pricing in the current environment, and a desire by companies to have a more granular, data-based approach to it. They're all in a situation where they've been working on cutting costs for quite a while, and they're absolutely going to keep pressure on that, but there are two drivers of profitability: one is cutting cost and the second is driving top-line revenue. Costs they've been doing for a long time, and top-line revenue just is not available to them in the current market, and price is very much a focus area for customers.

Focus: This is geared toward driving sales at a good margin rate, and I would assume it creates a bit of complexity in determining what kind of ROI you generate from intelligent pricing. How do your customers determine what kind of a ROI you've generated from using Vendavo?

Rapperport: We talk about it in terms of incremental return on sales. We typically can deliver 1 to 3 percent incremental return on sales. For each $1 billion in sales, that's $10 to $30 million per year of incremental profit. That 1 to 3 percent translates for a typical manufacturer to 10 to 30 percent in profit. When you look at how you measure that, we have a value realization team; they work with the customer at the beginning of the deployment, essentially understanding what are the different metrics that are going to be relevant and be important in a given customer implementation. An example of those would be price realization, or what percent of list price are you actually realizing in a segment or portion of your business. Another metric would be costs to serve recovery. There's going to be a set of costs to serve elements — I mentioned freight as one, technical services would be another, custom engineering would be a third, and there's a question of whether you're recovering those costs. Are you charging for freight and recovering 50 percent of what you spend on freight, 80 percent, 100 percent? Where are you on that? So costs to serve recovery is another bucket. A third bucket is customer volume compliance, looking at customer commitments. Are they fulfilling those volume commitments or not? Another would be sales rep margin performance. What we'll often see is high variability across the sales organization and margin being achieved by different sales reps, and you can then start to look at, are you getting rid of that variability and moving the average up. Those are some examples.

Focus: How do you think the recovery is going to impact your business? This seems like a tool that people may be buying because they think the need to improve efficiency now. When the economy rebounds, how do you see your position in the market?

Rapperport: I look at last year as a good example. We did extremely well as a company; I think we had roughly doubled license sales, and 68 percent growth in booking overall. That was strong performance in the first half of the year, when the economy was in far better shape as well as the second half, when it started hitting huge challenges. I think in a way it gets back to, this is a fundamental profitability driver that companies are realizing has not been addressed or harnesses and is available to them. I think the interesting thing is that, unlike some other top-line revenue-focused-drivers, this is available to them both in a challenging economy and in a strong economy. When I talk about those value numbers, numbers on that scale are essentially too big to be ignored whether the economy is doing well or not. So I think we'll do well now, and do well as the economy recovers.

Focus: Does Vendavo use its own products while selling your products, and does the product and the way you use it become part of your approach to your future customers?

Rapperport: We don't today, but that's because it's designed for companies that are larger than we are today. But it's certainly one of my goals to keep growing and rapidly get to a point where we are at a size where it does make sense. Hopefully in a couple of years, when I talk to you, we will be!