Leveraging Price Management to

Improve Profitability

In the current turbulent times, organizations are trying to

look for measures to contain the cost of products or services.
However, pricing and its impact on profitability is largely
ignored. This paper attempts to discuss how prices can be
managed effectively to increase profitability, the
importance of pricing as a discipline, and the benefits an
organization can reap by adopting a systematic approach in
enforcing and managing pricing. This paper also elaborates
on various aspects of a Price Management solution and the
requisite of optimization capabilities in such a solution. It
concludes with the key considerations involved in
deploying a Price Management solution.

Leveraging Price Management to Improve Profitability

Table of Content
1. Introduction to Price Management

2. TCS Approach to Price Management

3. Price Management Solution

4. Price Management Solution Deployment

5. Integration of Price Management Solution

with Enterprise Application

12

5. Conclusion

15

6. List of Abbreviations

16

Leveraging Price Management to Improve Profitability

About the Author

Purushottam Nivaskar
Purushottam Nivaskar has over 15 years of experience in
the IT Industry, of which the last seven years have been
spent in various Business Intelligence projects. Since
2007, he has been leading the Price Management
initiatives within the HiTech Industry Solution Unit in
Tata Consultancy Services (TCS).

Leveraging Price Management to Improve Profitability

Introduction to Price Management

Traditionally in a competitive market, profit improvement is viewed as a function of reduced costs. Adequate thought
is not applied to the importance and the ability of pricing to improve profit, without it having a negative impact on
other strategic objectives such as volumes and revenue.
General observations on price reveal that all productivity improvement measures through automations of processes
in supply chains, manufacturing, distribution networks and tracking customer orders focus on improving efficiency
to reduce the overall fixed and variable cost. However the mechanisms used for pricing a product have remained
relatively manual like using spreadsheets and macros.
At times, critical information such as competitive data, price lists, bundled offers and the pricing strategy remain
locked in spreadsheets of individuals. This reduces the ability of the organization to effectively leverage such
information in activities such as price setting, offer creation, Request for Proposal (RFP) responses and competitive
analysis. The processes are highly individual dependent, restricting the ability of organizations to respond
dynamically to the changing market environment.
It is observed that in a given situation, increasing the price yields more profit margin compared to reducing the cost of
a product. As illustrated in Table-1, an increase in price by 10 percent results in 10 percent more profit compared to
reduction of cost by 10 percent.

Case 1

Case 2
Increase Price by 10%

Reduce Cost by 10%

Baseline
30,000.00

Price

30,000.00

Price

33,000.00

80%

24,000.00

Cost

21,600.00

Cost

24,000.00

Profit 20%

6,000.00

Profit

8,400.00

Profit

9,000.00

Price
Cost

Incremental
Profit

600.00

Incremental
Profit %

10%

Table 1: Impact on Profit: cost reduction versus price increase

Also, it is observed that if business is operating on a very thin margin, then the impact of increased price on profit is
significantly more. As an example in Table 2, even with 10 percent increase in price, profit increases by 100 percent.
This is highly critical in the current business scenario of weakening demand and depressing revenue and profits.

Increase Price by 10%

Baseline

Price

30,000.00

Price

33,000.00

Cost

90%

27,000.00

Cost

27,000.00

Profit

10%

3,000.00

Profit

6,000.00

Incremental
Profit - (Direct
impact on
bottomline)

3,000.00

Incremental
Profit %

100%

Table 2: Impact of increased price on profit margin

However, the realities of the marketplace are not so straightforward. Ad-hoc price increase can deter customers from
purchasing or expose opportunities for competitors. On the other hand, ad-hoc price reduction can impact revenue

Leveraging Price Management to Improve Profitability

and profitability. The marketplace is continuously evolving. For most of the products, more so in industries which are
at the forefront of the technology revolution such as High Tech, Telecom, Aviation, Utilities, significant R & D cost is
incurred even before it is launched into the market. Some of these products have a very niche market to target. Such
situations, where huge investments are involved and product retiring happen quickly exert immense pressure on
organizations to ensure that they recover the costs (and make profit) within the available product life and market.
Fierce competition and accelerating product commoditization compel organizations to restrict any opportunities of
experimenting with prices.
Organizations considering the option of raising prices without losing market shares are challenged with many
questions such as :
! How to find the best price objectively?
! How to position this price into the current market situation?
! How does this price compare with other competing products?
! Is the process to find such revised prices repeatable over a period?
! Can it be used consistently by multiple users, for multiple products, for multiple customer segments?
If such questions remain unanswered, organizations tend to get defensive leaving money on the table or use intuition
and apply ad-hoc pricing, both ultimately resulting in revenue leakage and reduced profitability. Hence, finding the
optimum price is very desirable.
Price Management is a discipline that:
Aims to increase revenue and profitability
! By increasing or avoiding loss of market share
! Across one or more company product(s)
! Over an extended period of time
! In a consistent and predictable manner
By helping to find the optimum price for
! Identified product item or product line
! In a defined market segment (customer and geography), at a particular time
! In a given competitive environment (competing products and prices)

Leveraging Price Management to Improve Profitability

TCS Approach to Price Management

TCS recommends a holistic view of the pricing processes across the organization. Accordingly, the organization
should identify stakeholders, processes, data elements and technologies involved in the pricing processes.
Organizations must explore opportunities to improve the business processes as well as avenues to leverage
advanced technologies for processing data that add value to these processes. While defining the scope of the Price
Management solution, an organization must identify:
! Key pricing processes in the organization
! Opportunities of improvement in each of them
! Potential benefits of each opportunity
! Changes required to improve each process process change definition, impacted users, required data sets, cost
of implementing the change, time/effort required and so on
! Key capabilities required in the solution for each of the processes
! Once identified, organizations must evaluate each opportunity against benefits, costs, payback time and then
prioritize them.

Price Management Solution

To maximize returns, the Price Management solution must encompass the entire product life cycle. Typically, it
begins with the initial price, when a new product is introduced into the market and ends with the markdown prices
that drive product clearance.
Scope
The Price Management solution must include processes involving the various stake-holders. The key process areas
are illustrated in Fig 1.

Set Product Pricing Objectives

Set Product Reference Price
Set Product Segmented Prices

Price
Optimization

Price
Execution

Price
Enforcement

Update Price Repository

ERP / CRM / POS Systems
Distributors
Resellers

Deal Management
Price Rules Management
Contract management

Fig 1: Price Management - Key process areas

Leveraging Price Management to Improve Profitability

Price Optimization
These processes help execute SWOT (Strength, Weakness, Opportunities, Threats) analysis, which includes
competitive analysis to identify key focus areas and related pricing strategies.
Price optimization involves processes to:
! Analyze previous data, future trends, competitive information, costs involved and Key Process Indicators (KPIs).
! Segment customers, products and bundles.
! Determine segmented prices and offers.
Price Execution
For any organization, there exists multiple order capturing mechanisms. Some are located within the firm while
others reside on partner networks. Product prices are therefore disseminated from multiple points. Price execution
processes ensure that the right price is made available at every disseminating point at the right time.
Price execution involves processes to:
! Propagate price-lists; offer details, new contracts information to all the points that disseminate prices such as
Point of Sale (POS) systems, deal management systems, information portals for sales force and entities such as
resellers and distributors.
Price Enforcement
The mechanisms enforce applicable pricing rules for each order logged in any of the order capture systems. Based on
the order details such as customer, products, quantity, these processes find out and apply appropriate pricing and
discounting rules. For Business to Business (B2B) orders, relevant contracts, quotes are considered to determine
appropriate price.
Price enforcement involves processes that:
! Enforce prices through pricing rules compliance.
! Use workflow-based approval process; facilitate collaboration between different stakeholders while
determining prices and quote responses.
Fig 2 illustrates the key activities that must be performed in Price Management.

Set Product Pricing

Objectives

Set Product
Reference Price

Set Product
Segmented Price

Update Price
Repositories

Deal Management

Analytics

Analyze KPI trends

such as - Sales,
Demand

Define Segments for

Product Customers/
Geo etc.

Analyze Prev. Ref.

Price against
actual price trends

Update
Currency
References
Define
Product
segments

Analyze competitive
price trends against
Ref Price

Derive Local Currency

Ref price using Global
Ref. price

Update Price
Master
Repository
Register
Quote
Request

Trend Analysis

Collate influencing
factors for
segments

Generate Price
Lists, Price
Books
Create
Quote
Response

Analyze
competitive
Information

Validate
Quote
Response

Simulate multiple
prices and their
impact on KPIs

Modify
RFQ
Response

Fig 2: Price Management - Processes

Analyze trends Cost, Demand

Update prices in
OMS

Waterfall Analysis

Define Segmented KPI

targets - Profitability,
Vol. Rev etc.

Scatter
Plots

Set Global
Reference
Price
Set product
bundles, price
schemes

Communicate Price lists

to distributors, channels

Submit
Quote to
Customer

Register
Order

What-if
Analysis

Leveraging Price Management to Improve Profitability

Processes 1, 2, 3, 6 represent Price optimization functions

Processes 4, 6 represent Price execution functions
Processes 5, 6 represent Price enforcement functions
Benefits
Each of the process categories brings in distinct benefits to the organization. Price optimization processes facilitate
high quality analytics, unearthing valuable opportunities to optimize prices for various customer segments. The
segmented prices have direct impact on the revenue and profitability.
Price execution processes facilitate efficient distribution of prices, avoiding delays and inconsistencies, minimizing
loss of opportunities and revenue leakage.
Price enforcement processes facilitate complex order and quote management capabilities along with a
collaborative workflow-based approval process. These ensure that the complex pricing structures are complied with
while processing orders/quotes avoiding errors in order processing. This is very critical to ensure rule-based and
consistent pricing.
Following are the key benefits of using Price Management Solution:
! Faster pricing decisions enabling quick response to the fluctuating market situation.
! Centralized, consistent and transparent pricing processes that establish pricing discipline across the
organization.
! Increased leverage of pricing related data unearthing hidden trends and opportunities.
! Improved predictive analysis assessing multiple scenarios and facilitating informed decisions.
! Increased collaboration and accountability for stakeholders facilitating collective decision-making and
transparency.
These result in:
! Improved deal win-loss ratio.
! Increased profitability and revenue.
Recommended capabilities of a Price Management Solution
To achieve the above mentioned benefits, the solution should have commensurate capabilities. The recommended
capabilities in a price management solution are detailed as follows.
Data Modeling
Solution must have flexible modeling capability so that the respective business environment can be represented
appropriately, implying that the various data elements (customer, geography, product, competition and so on) are
captured with their respective hierarchies and inter-relations. Solution must facilitate changes to the model in an
efficient manner. It must also support large data sets for analysis, supported by advanced statistical functions.
Scenario Planning
Solution must have a What-if analysis capability to simulate different scenarios. For example, simulate price
changes by 10% or 14% and visualize the impact on say, sales volume, revenue for each of the price change.
Analytical Reporting
For the end-user, the solution is as good as its reporting capability. Hence, the solution must be able to generate
reports according to the requirements. Multi-dimensional analytical reports with drill up-down reports, graph and

Leveraging Price Management to Improve Profitability

charts creation capabilities are a must. Availability of predefined templates such as waterfall analysis, scatter plots
can add value to the solution.
Price List Management
The solution must be capable of creating and updating multiple price-lists. Also, it should be able to propagate the
price-lists to various order capture systems, with utmost transparency and efficiency.
Workflow-based Approval Process
With this, it must be possible for different stakeholders to collaborate and share information. This is very useful for
the sales team spread across different geographical locations, as they can collaborate while responding to a quote
request from a customer. Also, this can be effectively used by the pricing analysts who create reference prices.
Security
The solution must have a role-based, data-level security. Also, users must have the flexibility to share specific data
with each other at their discretion. This is essential to facilitate collaborative decision making. The solution must
enable the administrators and supervisors to manage and track user security.

Leveraging Price Management to Improve Profitability

Price Management Solution Deployment

On a decision to implement Price Management Solution, it is extremely important to analyze the pricing related
information.
Key Considerations
Some of the key points that one needs to ponder upon are:
Points
1

Which business processes are

impacted by this solution?
Who are the stake-holders of this
solution?

Explanation
For example, pricing analysts, sales force, product
managers, sales and marketing heads and senior
management.

What is the frequency of accessing

this solution?

For example, time-based access (daily, weekly or ad-hoc) or

transaction-based access (like for every deal).

What is the type of usage? How are

we going to use this?

For example, do we need standard, template-based

information every time or do we have an ad-hoc data
request based on the requirement?

How to make this solution

available to users?

How do we ensure that for every user category, there is an

optimal mechanism for delivery of information? Is it
possible to minimize the learning curve of the pricing
solution? Is it possible to leverage the existing core
applications that users are already familiar with?

What are the options to build this

capability?

Should we build an in-house application? Will it have

enough functionality and scalability?
What are the different tools available in the market? How
do we compare them and find the tool that best fits our
technology landscape?
Do we need a platform-based solution or a niche, best-ofbreed solution? How do we integrate a best-of-breed
solution into our technology landscape?
Last but not the least, what is the Total Cost of Ownership
(TCO)?

Leveraging Price Management to Improve Profitability

Deployment Options
Once the stakeholders and requirements are identified, there is a need to decide the deployment options.
Considering the complexity of a comprehensive price management solution, there are three options
1. Custom-built solution.
2. Enterprise Application Platform-based solution.
3. Best-of-breed Price Management solution.
Custom-built solutions
In-house (custom-built) solutions must be considered for very specific needs where, there is no expectation of
enhancing the functional scope of the application. It can be a very cost-effective solution if the requirements do not
need very advanced capabilities such as scenario planning.
Enterprise Application Platform-based solution
If business is looking only for Price Enforcement, Enterprise application-based solution is relatively simpler. But these
applications may not have built-in capabilities for Price Optimization.
According to the current scenario, Price Optimization capabilities are best available in best-of-breed solutions
compared to platform-based solutions.
Thus, we recommend using a best-of-breed Price Management solution that offers a highly flexible architecture
and features.
Best-of-breed solution
'Best-of-breed' solution is an off-the shelf niche product/solution that is best suited for a specific business
need. It provides maximum capability compared to alternative solutions such as modules from enterprise
applications, catering to this business need. It may need some configuration efforts to make it usable for
organization's requirements.
Typically, there are two ways of deploying a Best-of-breed solution:
! Deploying as a stand-alone solution in the organization.
! Deploying the solution as Services and using these services in another core enterprise application such as ERP,
CRM to offer seamless integration with the overall IT landscape.
Before considering the merits of these approaches lets consider user groups. Analysis of different users reveals two
broad categories of users. Power Users - users like Pricing Analysts, Product Managers, who have ad-hoc analysis
requirements. Normal Users - users like geographically-spread sales representatives, who need fairly standard sets
of analytics for different customers and products. Typically, there is fairly limited number of Power Users in an
organization whereas; there are a lot of Normal Users
Stand-alone Best-of-breed solution
Deploying the solution as a stand-alone solution favors the Power Users but not the majority of the Normal Users.
Normal Users typically need template-based information for a transaction such as, response to new quote request. In
this case, they will have to enter the deal information to obtain the template-based analysis of data. They have to first
learn a new tool and also spend time accessing the analytical information each time they need to. Hence, there is a
definite overhead of learning the new tool and the redundancy of data entry. This may lead to resistance from the user
community. Also this may impact the licensing cost of the tool.
10

Leveraging Price Management to Improve Profitability

Best-of-breed solution integrated with enterprise application using Service Oriented Architecture (SOA)
If the solution is deployed as a Service and integrated through enterprise application based on SOA, then the
Normal Users will be benefited as they can leverage their core enterprise application to exchange information
and obtain the analytics information without much effort. However, this type of deployment will severely restrict
the Power Users who would want to use the advanced features of the tool to obtain ad-hoc reports to facilitate
decision making.
Recommended Approach
As most of the organizations will have both types of users (Power and Normal), the best way to deploy this kind of
solution is to use both modes of deployments. Apart from providing the right kind of environment to each user
category, there are many benefits in using such a multi-mode deployment. The core enterprise applications such as,
ERP, CRM contain majority of the base data required by the Pricing Solution. Real time bridges to exchange customer
information, product information, quotes requests, sales data and other related information can be established
For Power Users, this will ensure that Pricing Solution remains in synchronization with the core enterprise
application. This ensures that analytics uses the latest data (apart from the previous data that it contains), that is very
critical for decision making.
For Normal Users, the predefined services exposed by the pricing solution, provide access to the predefined analytics
without extra efforts. Once the SOA-based interface is built, then accessing the predefined sets of analytics is very
simple and quick and does not require any extra efforts from the user. There is neither a need to learn any new tool nor
extra licensing cost involved.

Fig 3 summarizes the comparison of the three approaches.

For Development Efforts and
Cost of Ownership
1

Very High

High

Moderate

Reasonable

Low

Low on
Desirability

Custom-built Application

Price Optimization
Price Execution

Cost Ownership

Price Enforcement

Development Efforts

Enterprise Application
Best of Breed Solution
integrated with Enterprise
Application

High on
Desirability
Scalability

Learning Curve
For rest of the parameters
1

Limited

Fair

Moderate

Good

Excellent

Low on
Desirability

Extensibility

Advanced Analytics
Reliability

Data Synchronization
with other systems
High on
Desirability

Fig 3: Comparison of three approaches

*Note: The comparison can vary based on actual applications / products chosen and the customer IT, functional landscape

11

Leveraging Price Management to Improve Profitability

Integration of Price Management Solution with Enterprise Application

To explain the recommended approach, we will analyze the aspects of integrating the Price Management Solution
with the popular enterprise application suite, SAP.
Consider a use-case of Quote Management.
Typically, the steps in the process are:
1. Customer approaches a sales representative with Request for Quote (RFQ)
2. Sales representative registers the quote request in SAP Customer Relationship Management (CRM).
3. Sales representative analyzes the deal request and works out the best possible quote.
4. Sales representative sends the proposed quotation to the supervisor for approval.
5. Supervisor reviews the deal and approves (or rejects) the quotation.
Fig 4 illustrates how a Price Management solution can be leveraged in the Quote Management process of a typical
enterprise application such as SAP CRM (please note that similar integration can be possible with other ERP applications. SAP CRM is taken
for example purpose only). The Quote Management process spans across the SAP CRM and Price Management Tool. The
Netweaver Composition layer provides the business logic by interacting with the backend systems through Services.
The process is presented to the user through User Interfaces (UIs) in the Enterprise Portal.

SAP Enterprise
Portal

Netweaver
Composition
Environment
(Services / API)

Register
Quote
Request

Create /
Modify
Quote

Create Quote

Quote Analysis &

Confirmation

Modify Quote

Quote Review

Analytics

Data Synchronization
Backend System

Price
Management
Tool

SAP

Fig 4: Proposed solution using SAP SOA

12

Approve /
Reject
Quote

Leveraging Price Management to Improve Profitability

Solution Architecture
The Quote Management process discussed above can be realized using SAP Service SOA. Fig 5 provides an overview
of the architecture at a high level.

Enterprise Portal

Composite Application
SAP NetWeaver CE Server

Service Registry

Enterprise Services,
Web Services and
BAPIs
SAP
CRM

SAP NetWeaver WAS 7.0

Web Services

SAP
PI

Price
Management
Tool

Automated
Synchronization
(Optional)

Server

Fig 5: Solution Architecture

The SAP CRM functionalities are exposed through SAP Enterprise Services, Web Services and (or) Business
Application Programming Interfaces (BAPIs). The Price Management tool functions are also exposed as web
services. These services are published in the service registry of the landscape. The Composite layer consumes these
services to build the solution application. The user is provided with a role based access to the Composite through the
Enterprise Portal.
SAP Process Integration layer can be used to provide automated synchronization between the SAP CRM and
the Price Management solution. It can also be used to build and extend the SAP Enterprise Services required for
the solution.

13

Leveraging Price Management to Improve Profitability

Composite layer and SAP tools

Fig 6 summarizes the layers of the composite application along with the SAP tools used to implement them.

SAP Tools

SAP Enterprise

Role Based access on Portal

Process Workflow

Guided Procedures

SAP Process

User Interface Layer

CAF Service Layer

CAF - NWDS

Enterprise Service

Service Registry

Process

Service Provisioning Layer

Fig 6: Composite Layers

The layers Process Workflow layer, User Interface layer and Composite Application Framework (CAF) Service layer
constitute the composite application. The CAF service layer is the business logic layer that interacts with the services
of SAP CRM and Price Management tool. It also provides local persistency and additional application logic support.
The User Interface layer provides the capability to define role-based user interfaces. The Process Workflow layer
implements the Quote Management process, which is accessed by the enduser through the Enterprise Portal. SAP
Netweaver provides the tools and the platform to implement the above mentioned layers.

14

Leveraging Price Management to Improve Profitability

Conclusion
By deploying Price Management solution, organizations can establish and exert control over the pricing processes.
Using scenario planning capabilities, they can increase predictability of various KPIs like sales volume, sales revenue,
margins and market share. Using analytical capabilities, they can leverage their own data and competitive data to
understand the competitiveness of the market. By establishing workflow based pricing processes, organizations can
bring in transparency, discipline and accountability in the function of price management.
By adopting multi-mode deployment strategy, an organization can service its different user segments in the best
possible manner. The price management solution will have a very small footprint, but can still benefit a larger userbase. By establishing a bridge between the enterprise application and the price management solution, the entire
pricing process can leverage latest data from the enterprise application thereby significantly improving its currency,
which is very critical in the highly dynamic market environment.
Thus, the implementation of Price Management solution results in improved governance, quality and speed of the
pricing process, thereby providing opportunities to improve profitability and revenue. Fig 7 summarizes the benefits
of implementing a suitable Price Management solution.

Organization Benefits

Improved
Profitability
and
Revenue
Improved Win-Loss Ratio

Business Benefits
Fast Pricing Decisions
Consistent Pricing Policies
Empowered Field Staff
Ability to Leverage Intelligence Data

Process Benefits

Holistic View of Pricing Data

Advanced Analytical Capabilities
Institutionalized, Integrated Process
Increased transparency and Accountability

Fig 7: Price Management Improvement benefits summary

15

Leveraging Price Management to Improve Profitability

List of Abbreviations

Term

Description

RFP

Request for Proposal

KPI

Key Performance Indicator

SOA

Service Oriented Architecture

CRM

Customer Relationship Management

ERP

Enterprise Resource Planning

R&D

Research and Development

SWOT

Strength, Weakness, Opportunities, Threats

POS

Point-of-Sale

B2B

Business to Business

TCO

Total cost of ownership

16

About HiTech Industry Solution Unit

About Tata Consultancy Services (TCS)

TCS HiTech Industry Solution Unit comprises of Semiconductors,

Tata Consultancy Services Limited is an IT services, business

Electronics, Computer Platforms & Services, Software industry and

solutions and outsourcing organization that delivers real results to

Professional Services. At TCS, we leverage our experience in

global businesses, ensuring a level of certainty no other firm can

Engineering Services, Business Process Transformation, end-to-end

match. TCS offers a consulting-led, integrated portfolio of IT and IT-

IT Solutions and Infrastructure Services to provide comprehensive

enabled services delivered through its unique Global Network

solutions that will help the High Tech firms and manufactures

Delivery ModelTM, recognized as the benchmark of excellence in

accelerate product innovation, achieve operational excellence,

software development.

attain greater profitability and maintain market leadership.

A part of the Tata Group, India's largest industrial conglomerate, TCS
Our proven consulting capabilities, Extensive engineering

has over 100,000 of the world's best trained IT consultants in 50

expertise, and in-house innovation labs provide breakthrough

countries. The company generated consolidated revenues of US

transformation of product and service portfolios. Our recent

$5.7 billion for fiscal year ended 31 March 2008 and is listed on the

investments include dedicated labs and infrastructure in support

National Stock Exchange and Bombay Stock Exchange in India. For

for convergence solutions, embedded printer solutions, storage

more information, visit us at www.tcs.com

optimization and High Tech Center of Excellence based in

Eindhoven (The Netherlands).
To know more about how we help companies in the High Tech
Industry overcome their challenges and achieve real business
results, email us at HiTech.Marketing@tcs.com

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