Yet they also need to understand how their prices drive demand and influence competitors. A sophisticated pricing strategy pioneered by the airlines and powered by high-end software may be able to help them do just that. The strategy, called revenue management, is a scientific way of calculating prices to maximize profits, based on models of customer demand, price sensitivity, margins and other sales factors. The software crunches historical data on demand and price sensitivity. The airlines now let software make automatic pricing decisions for well over 90 percent of the tickets they sell, says Andrew Boyd, vice president of research and design and senior research scientist at Pros.
Implementations can run into several million dollars.
But depending on the industry and the company, deploying revenue management software can result in 2 percent to 10 percent increases in revenues, Boyd says. They could adjust prices so that the plant always runs at full capacity, charging lower prices at times of low demand, higher prices at times of high demand, he says. Or they could extract higher prices from customers who need a product more quickly, much the same way an airline charges customers more money for tickets purchased less than seven days before a flight. Yet there are signs that revenue management techniques will be used to help sellers participating in B2B marketplaces. Forrester research analyst Navi Radjou notes that revenue optimization software vendors are beginning to pitch their products to manufacturers that want to participate in online B2B marketplaces and that need help setting prices in real-time.