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Love Tools but Love People More

September 2015 Corporate 1 Comment

The information revolution has changed just about every aspect of modern society.

Just consider how smartphones have come to define our interactions. Ten years ago, it was reasonably possible for people to navigate the western world with nothing more than a smile, a good attitude, and a willingness to ask strangers for help. Today, smartphone GPS systems, smartphone electronic tickets, and smartphone social networks seem to define how we interact with each other. Instead of saying an impromptu hello to strangers at networking events and on the streets, we use smartphone apps to identify who is available for a conversation (or more).  Who needs advice from a stranger? A search will find the information more reliably.

Are people redundant?

Even in enterprise pricing, we have apps for that.  A decade ago, pricing with simple formulas and perhaps an excel spreadsheet was considered normal. Today, enterprise pricing software will provide pricing analytics, manage price updates, and be encoded with algorithms.  And, our algorithms, which used to be simply called approaches and formulas, can suggest price improvements, manage complex pricing challenges, and even provide real-time revenue management solutions. Who needs to hire fickle pricing employees when you can buy software to do the job faster and more accurately?

Wait a minute. Seems like we are missing something.

Tools Without People Are Useless

Just as a hammer without a carpenter is useless, so is software without a human.

In both of the above examples, some human has to decide what they want the technology to do and what to do with the output of the technology.  Let us focus on pricing to make this clear, but feel free to explore your thoughts about the usefulness of your smartphone without you to make the argument for me.

While pricing analytics software can create net price bands, price waterfalls, and price to market segment plots, these forms of analysis alone don’t make decisions.  They provide historical benchmarks and clarify what has happened to enable better decisions.  But those decisions must still be made by people.  For it is people who decide what they want the business or organization to do, not software.  Moreover, deciding which elements to identify in the price waterfalls, which segments to study in the price to market segment plots, and which price bands are relevant are all decisions made by people.

And while pricing algorithms can enable price setting, price improvements, and even dynamic pricing, it doesn’t do it in a vacuum.  People with deep knowledge of pricing theory and a breadth of knowledge across pricing methods and structures are needed to determine when to use which algorithm.  For instance, yield management holds little importance for a grocer just as is category management holds little importance for an airline.  Both are great approaches, but they solve different problems and the challenges faced by an airline and a grocer are not all the same. People make decisions regarding which methodology is relevant to which pricing challenge, not software.

For enterprises’ in the 21st century, people are of even higher importance for managing pricing decisions.  Pricing software can reveal important information or coordinate actions across a large organization, but that information must be understood and acted upon by people.  Pricing professionals who understand pricing analytics, pricing structures, price setting methodologies, and price variance management are valued precisely because they understand and can interpret the outputs of enterprise pricing software. They can determine which challenges enterprise pricing software can best address, and which it cannot.

Too often I see companies buying enterprise pricing software before they have a team to use it, only to see those same companies building out a pricing team once the software is installed or worse — letting the pricing software sit on the sever relatively underutilized ‘shelfware.’

Putting the cart before the horse is an entirely avoidable error.

Instead of making people redundant, the pricing software revolution has increased the premium for people who deeply understand pricing.

People Without Tools Are Underpowered

But those people alone shouldn’t do it all.  A carpenter without a hammer might eventually be able to make a table, but who wants to wait that long?

A well-trained pricing professional can conduct price setting, pricing analytics, and price structuring with nothing more than a spreadsheet. He or she can even run advanced algorithms in yield management, bundling, or velocity pricing with a spreadsheet.

As a proof of concept, manual approaches work well and elucidate all the many caveats, alternatives, and required input information.  To many, it is a best practice to go through the effort manually first to prove the concept and only then turn to software to automate.

But once that proof of concept is completed, repeating the process on a regular basis, if not daily across the organization, which may span the globe, is relatively unmanageable as a purely manual process.

Software is excellent at repeating routine efforts. It enables the pricing professional to work and drive decisions faster, freeing up their time for more strategic challenges.

Consider the following story I heard from a pricing professional whose income had increased by more than 50% in just two years.  When she was first hired at her company to do pricing, her boss gave her a spreadsheet with thousands of items and prices and told her to put them into the system.  She balked.  She wasn’t hired as a data entry person.  She was a pricing professional. Instead of spending the first months at work manually entering prices, she told her boss to buy a data loader to automate the effort.  Fortunately, the boss had the foresight to listen. She used the software to automate the routine work and instead focused her efforts on price improvements and strategy. The result: profits increased and did you read the first line about her income going up?  That was because her productivity went up as well.

Pricing software empowers the pricing professional. Without it, they are underpowered.

Productivity

The Cobbs-Douglas Productivity Function in macroeconomics states that the productivity of a nation is dependent upon the labor and capital deployed and the manner in which it is combined (also known as total factor productivity). Similarly, organizational productivity requires both people and software working together.

Tools without people are useless and people without tools are underpowered.

 Learn More

Want to empower yourself or your team to become like the highly informed pricing professionals mentioned?  Attend the Value Based Pricing and Corporate Strategy 5-day intensive executive education held by Wiglaf Pricing with me, Tim J. Smith, PhD, as your instructor.

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  • Anirban

    Excellent article Tim. I don’t think any software is powerful enough to think beyond an algorithm. So replacing man with machine implies relying totally on a set algorithm. I think that’s dangerous … as dangerous as hoping and betting that a chess software will consistently defeat grandmasters.
    I also agree that making tools available is important to make a pricing team more capable . So the challenge is to strike a balance between man and machine . Unfortunately lot of firms find that bit tricky.

About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

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