Russ: This is the BusinessMakers Show heard on the radio and seen online at TheBusinessMakers.com. It's guest time on the show and I have a unique guest today because I have the chief operating officer of a very large, publicly traded software company right here in our backyard that I think must be the best kept secret in the city of Houston, Texas because with me I have Tim Girgenti, the CMO of PROS. Tim, welcome to the BusinessMakers Show.

Tim: Thank you, Russ. It's great to be here. I really appreciate you giving us the opportunity. You're an icon in the Houston business community and it's a pleasure to be here.

Russ: Well, thank you very much. Well let's start by you telling us about PROS. I mean I'm impressed with the success, the size of the company, the number of employees and I knew nothing about PROS. Tell us about PROS.

Tim: You bet. So PROS is a pricing and revenue management software company and that puts us in the profitability business.

Russ: Right.

Tim: We provide software that helps our customers dramatically improve profitability, but also defend and protect the margins that they've worked so hard to earn and we've been doing that for 25 years right here in Houston the entire time. We have over 480 employees and we did about $74 million in revenue last year and we have customers now in more than 50 countries and we went public in 2007 under the ticker symbol TRO on the New York Stock Exchange.

Russ: Alright. Well obviously the show has many business and business oriented listeners in our audience and I think they all know the importance of price at the end of the day. My goodness, the ability to actually have some control over your pricing and maximizing it has huge possibilities. So tell us a little bit about the history. Where did this business start that enabled and planted the seeds for the success of today.

Tim: You bet. So the company 25 years ago was focused primarily in the airline industry.

Russ: Okay.

Tim: And bringing some of the really mathematical and statistical analysis to get the story behind the data in how passengers were buying tickets and what we do with that is we've helped our airline customers, using that same analysis, to understand the demand for their seats and the different types of buyers and the different demands that those buyers have for seats. So for example, a business buyer, as I'm sure you've experienced, is more likely to wait till the last minute to buy a ticket and our system helps the airlines understand how many seats should they hold so that business buyer has the privilege of waiting till the last minute. That whole process is predicated on something called willingness to pay. We took all of our learnings from the understanding willingness to pay in the airline industry and we moved about seven, eight years ago into the business-to-business world of pricing. So now we help manufacturers, distributors and services companies tackle the same problem and that is understanding what are their customers willing to pay for the value that they perceive in a product.

Russ: Okay. Real interesting. I mean the airlines thing makes a lot of sense to me. There's that supply and demand thing and they know if they're selling out those seats real early, well the last ones they gotta maximize the price. That makes a lot of sense. Willingness to pay is an interesting term that I think a lot of small business people sort of grapple with all the time. They don't know, my God, what do we price this thing and invariably they get an order and they do a transaction and the first reaction is wow, I priced it too low and those sorts of things. So I understand it very clearly on airline seats. I don't know if I understand how in the world PROS carried it over to these other industries.

Tim: Sure. That's a great question. If you think about it, I'll give you an example of one of our customers who has - they have 30,000 products and that's actually not that many in the business-to-business world, but even they struggled with this challenge of if I have 30,000 products and I've got customers spread all over the globe.

Russ: Right.

Tim: How do I get to willingness to pay. It's the Holy Grail.

Russ: Right.

Tim: And our secret sauce is we actually go and we go back and we analyze all of their historical transaction and in those transactions what you can start seeing are the buying, behaviors in buying patterns that start revealing willingness to pay for their customers and all it is about is helping these companies get to the price point that they know they can keep their customer happy and satisfied, but not be giving away too much value and the story all is in the data.

Russ: Okay. Well that's interesting. Now, when you - when you said that we analyze their history, I mean, are you in the service business as well or are you giving them software that actually analyzes their history themselves.

Tim: We do both.

Russ: Okay.

Tim: In fact, in the beginning of an engagement we will often take their data and we will perform with our team of pricing scientists is what we call them.

Russ: Right.

Tim: They will actually perform a service to do the analytical work and then we implement that right into the software so that it becomes a living, breathing part of a customer's operation.

Russ: Right.

Tim: And the concept of price optimization is then every transaction after that becomes a part of the continuous price setting process. So it factors in each transaction going forward. So think of that as a one-time initial setup and then from there it becomes a part of the business.

Russ: Okay. Now I guess - I guess all pricing is variable to a degree.

Tim: Mm-hmm.

Russ: Ya' know, some of it retail, you probably sort of establish it once you put the price tag on and put it in front of the public and then the only way you can monkey with it is with sales and that sort of thing, but, but I guess there's a lot of other businesses that, that have a rather dynamic pricing opportunity. I mean clearly airline industries do 'cause they don't have to put a price tag on each seat. Are there lots of business like that though that have the ability --?

Tim: Absolutely. So, in every market and everyone of our - I mean, again we serve manufacturers and distributors and services organizations. These companies are selling medical supply equipment. They're selling parts for vehicles and heavy equipment and the fact is that no two customers will value the same product the same.

Russ: Right.

Tim: In any market.

Russ: Right.

Tim: So that's again, we go back to how does - example is a company that produces automation controls.

Russ: Right.

Tim: When they serve their market they're selling both to end user commercial environments and also to distributors. They've got the same challenge.

Russ: Right.

Tim: What's the right price to get to market. What's the competition doing. So we not only help them arrive at the right price for the right product every time, but we help them do it at the speed of business and that's one of the biggest differences in today's market with all of the fluctuation in commodity costs and currency challenges. If you're still pricing using Excel and spreadsheets, you're likely to be outdated in the market with your prices and then therefore you're at risk. You're at a competitive risk.

Russ: Real interesting. Real interesting. Now, ya' know, you mentioned they might be out of sync with their competitors. Does the software do a competitive analysis at the same time?

Tim: Well, we actually we bring the competitive data into the system, but we don't actually go out and collect that competitive price data.

Russ: Okay. That's the responsibility of the customer, your customer to do that -

Tim: We have partners that help with that certainly, but yes, we -

Russ: Right, but you clearly never wanna get in the business of being accused of sharing one customer's pricing with another.

Tim: Absolutely not.

Russ: Yeah, that's right. So I'm also curious though, what's the smallest customer that might be able to take advantage of your software?

Tim: The way we view it is if you're a manufacturer, a distributor or a services business and you're doing $100 million of revenue or more, you're ready for pricing software.

Russ: Right, okay. And I'm also curious, have you ever gone and started with a prospect, gone through the analysis and discovered, man, they were doing a good job already.

Tim: Not that I know of.

Russ: Well, I'm sure. I mean it's such an important yet emotional part of business. You're mentioning people doing it with spreadsheets. I'm sure you probably still find that, maybe even with some big, big clients, some big customers.

Tim: All the time.

Russ: And I know that sometimes in some industries, just the ability to increase the price a very small amount has huge dividends on the bottom.

Tim: Yeah. So just some data points on that. McKenzie conducted a study several years ago -

Russ: Right.

Tim: -- that said that no other lever in a company that a company can pull will drive profitability more than price. A one percent improvement in price will generally yield a nine or ten percent improvement in profits.

Russ: Right.

Tim: It's the small hinge on which all the profits swing and the challenge for companies then is great, you know that, but now what do I do about it.

Russ: Right.

Tim: The question is how do I raise my prices, where do I raise my prices and where do I defend to protect my prices.

Russ: Right.

Tim: And without the science, without the math behind it, it's an emotional issue and so we try to pull that away and just look at the facts and identify where companies have opportunities to improve price and to improve their customer satisfaction.

Russ: Cool. Talking with Tim Girgenti, the CMO of PROS and we'll be back with more with him after this. This is The BusinessMakers Show heard on the radio and seen online at thebusienssmakers.com. This is The BusinessMakers Show heard on the radio and seen online at theBusinessMakers.com. And continuing on with Tim Girgenti, the CMO of PROS, this cool software company that helps you deal with the optimal price. Tim, tell us about some customers. Tell us who you're doing business with and have they actually had success.

Tim: You bet. So some of our customers that you'd recognize are BASF, Georgia-Pacific, McKesson, Honeywell. So some of the largest companies -

Russ: Wow.

Tim: -- in the marketplace.

Russ: Wow. Have they been doing it long enough to have some feedback to you that is successful?

Tim: Absolutely. The story's out. Gardner produced a report that said that if you invest in pricing software you can expect to improve your margins by as much as two percent and we have cases where it's been far greater than that. One of our industrial manufacturing customers last year reported to us that they increased their profitability by $106 million in one year.

Russ: Gees.

Tim: Yeah, we're not talking small process efficiency gains here.

Russ: Seems like PROS oughta' get into some of that success pricing themselves. Just share with us your success might be cool. You mentioned that McKenzie talked about if you use pricing software, so like every other industry there are competitors then, right?

Tim: Oh yeah, absolutely.

Russ: And did the other competitors sometime come through this airlines pricing door?

Tim: No. No, most of them have not come through that door. We've been in this business far longer than anybody else and all of that experience that we gained in one industry really helped us carry over and become the dominant player in the business-to-business pricing space now.

Russ: Okay. Well I'm curious also though that, as I keep pointing out, I didn't - there's a best kept secret here that this very successful, large company and yet you're the first CMO and you've been there how long now?

Tim: I've been here for a year and a half.

Russ: Okay. Why wasn't there a CMO previously?

Tim: Oh, I think it's just a part of growing. I think it's just growth.

Russ: I thought you were gonna say they hadn't found me yet.

Tim: No, no, no.

Russ: Okay.

Tim: It's just a part of our growth.

Russ: Okay. But there always had been -

Tim: Oh yeah.

Russ: -- a marketing initiative.

Tim: Oh yeah. Oh absolutely. We're about to have our 17th annual revenue management conference. It's the largest attended revenue management industry event. So no, we've been marketing for many, many years.

Russ: Okay. Wow. So your background, was your background in pricing?

Tim: My background's in software, enterprise software.

Russ: Okay. And enterprise software, ERP, that's where this gets integrated in all these companies pretty much.

Tim: Absolutely. So you think about where transaction data exists and where it comes from. It'll come from an order management system. It'll come from an ERP system or CRM system and we integrate with all of those environments and that's where we consume the data that we need to actually provide the recommended prices.

Russ: Okay. Well I'm curious where the decision's made, ya' know, on the customer. I mean does it come through the CFO that says, "Wow, this'll take some heat off of my back if we."

Tim: That's a tough one for us because pricing touches every part of a business.

Russ: Right.

Tim: So in some recent reports that Accenture produced, it said that pricing is most commonly owned in a business unit and then after that it's owned in marketing and then it's in products and then it's in finance and it's everywhere. And so what we have experienced is pretty even distribution.

Russ: Wow.

Tim: But you mentioned CFOs.

Russ: Yeah.

Tim: And increasingly in this economy we are finding that CFOs are stepping up and looking at pricing software. They are considered the guardians of profitability in their business and you can't separate pricing and profitability.

Russ: Right.

Tim: So right now what CFOs are realizing is that pricing technology can actually be a safety net for everything that they've done to create value in their business.

Russ: Right.

Tim: And so what the technology will do is help them protect against rogue pricing in their business.

Russ: Right. Now you mentioned in this economy. I'm just curious how the software takes that into consideration. Is there - is there a direct, ya' know, lever for the economy or do you just see the results of the economy in all the other variables that you're watching?

Tim: For each customer, again, the prices are predicated on transaction behavior. So as those transactions are conducted, the system will actually optimize on the fly -

Russ: Okay. So, so if the economy were so bad, which one might argue it's there now, that the transactions would be headed south, too, and that would just be taken into consideration and said, okay, last week we thought you can get 175 for this. This week we think it might be 159.

Tim: Yeah, that's right.

Russ: That sort of thing?

Tim: Willingness to pay changes in different economic environments.

Russ: Right.

Tim: I mean, from a - just a simple example from a consumer standpoint, which we don't price around, but think about what you'd pay for an air conditioning unit in August here in Houston versus what you'd be willing to pay in January.

Russ: Right, wow.

Tim: So that's analogous with the economic environment as well.

Russ: Well, when I think of the economic environment, I wonder if the federal government might be a good customer for your software to go in -

Tim: I probably shouldn't comment on that.

Russ: -- and evaluate. Well it's real cool. I'm also though interested when you - when you do an installation, ya' know, and, ya' know, it's kinda' related to my question about where's the decision made, the CFO level, does there end up being sort of a director of pricing, a person that's the top person that's operating the software and then feeding the recommendations back to the - to the board or to the CFO?

Tim: You bet. You bet. So pricing as an industry is actually going through an incredible maturity growth cycle right now. There are more pricing positions available and open in the market than we've seen in many, many years -

Russ: Wow.

Tim: -- and that's because of the evolution of pricing technology driving increased pricing capability. So yes, there are often times directors or pricing and in some businesses, that's a standalone discipline. In others it sits in marketing or finance, but there generally is someone who's accountable. One of the interesting things that we found is the heads of sales, VPs of sales are keenly interested in our pricing technology because in a negotiated business-to-business environment what we're doing is we're supplying their sales reps with the data they need to negotiate with their customers with confidence and to raise, really to raise the degree to which they can retain their customers and yet not give value away. One customer story that relates to that, a VP of sales actually that was the sponsor for us. This was a large $18 billion electronic components distributor. The VP of sales took it upon himself to say, "I think that we can get better at holding ground on pricing. I think we're giving away too much value." So they hired us. We did just as I mentioned earlier in terms of the analytics. Then we started providing on a deal-by-deal basis recommended prices.

Russ: Gees.

Tim: And within nine months they saw their profit improve by 280 basis points, or 2.8 percent. For a distributor, as you can imagine, that generally run in the margin range of 1 to 4 percent, it was a substantial increase in the profitability.

Russ: Wow. Now deal-by-deal pricing is quite a bit different than telling somebody how much we think we can get for this airline seat these days.

Tim: Oh yeah.

Russ: I mean is that - is that sort of the evolution of the product? Eventually they said, "Well wait, we can't do the same game over here. These people are going out on a very important price quotes." Huh. That's interesting. It seems like you wouldn't have as much data, analytical data from the past to deal with so it's gotta be a little bit more complicated and you must be giving ranges as opposed to target prices.

Tim: You couldn't be more correct. That's exactly what we're doing.

Russ: Okay.

Tim: The data does exist in fact. It actually is there. Again, think about the companies that we're dealing with. These are large organizations so the data's there, but you're exactly right. What we're doing is providing recommended prices. We do two types of price setting. One is list pricing.

Russ: Right.

Tim: What's the right price for your product and we do optimize there as well, but then on a deal-by-deal basis we are recommending a range, a price range. We call it target, floor and stretch and what that does, it allows the salesperson to still have room. So think of it like a GPS. We're like the GPS of pricing. We can provide you the turn-by-turn instructions on how to get from Point A to Point B, but you still have your hands on the wheel and the sales reps still have the ability to take into account all of the non-numerical factors.

Russ: Right. And sometimes my GPS isn't right, too, so you gotta have your hands on the wheel.

Tim: And they're constantly getting better.

Russ: Okay. That's right. That's right, too. So, but I'm also curious about this thing you said. There's a lot of - I think you said there's a lot of pricing positions available now meaning that there's like a - there's a category of executive level employment now that's all about pricing?

Tim: Absolutely. We're starting to see more chief pricing officers -

Russ: Ah. Wow.

Tim: -- or senior vice presidents of pricing. You can liken it back to supply chain. So there weren't many chief procurement officers -

Russ: Right.

Tim: -- 15 years ago, 20 years ago. Now it's pretty common to have a chief procurement officer or a VP of procurements.

Russ: Can you - are there business schools now that offer some expertise in that category?

Tim: Absolutely, yes. Texas A&M has a great pricing -

Russ: Wow.

Tim: They have a professor there. He specializes in the pricing for the wholesale distribution space.

Russ: Okay.

Tim: A professor out in Berkley just won an award for his excellence in pricing.

Russ: Wow.

Tim: Georgia Tech has a great pricing program. Many business schools now are starting to bring pricing into their curriculum.

Russ: Wow. Okay. So, couple of things before I let you go because, ya' know, we keep mentioning public, but the public only went public three years ago?

Tim: 2007.

Russ: 2007. And were you here at the - no, you weren't here at that time -

Tim: I was not -

Russ: -- but that must have been, you must even know, it must have been a big step for the company -

Tim: Oh sure. Sure. It's a great milestone.

Russ: Yeah, and everybody writes it off as a success.

Tim: Oh, invariably, yes.

Russ: Okay. But now as a public company you produce earnings all the time and I understand you recently had an earnings report.

Tim: We did. We had our earnings report for the second quarter. We reported last Thursday and we're delighted to report that we not only beat guidance and revenue, but in operating income as well we came in at a growth rate of 33 percent. So year over year. We gave guidance to finish the year between $95 and 96 million in revenue. Last year we did 74 so we feel like we've got a great tail wind behind us and we're excited about our customers, our people, our products. We couldn't actually be in a better position than we are right now. It's the healthiest and strongest our company's been and it's a real pleasure to be here -

Russ: Wow.

Tim: And to be here in Houston while it's all happening.

Russ: That's so cool, but I'm more curious, how did you do on your own pricing?

Tim: We're doin' okay.

Russ: Alright, great. Well Tim, I really appreciate you comin' in and telling us this cool story.

Tim: No problem.

Russ: It's neat. Alright. That's Tim Girgenti, the CMO of PROS and this is The BusinessMakers Show heard on the radio and seen online at theBusinessMakers.