I work with companies on a variety of application domains for technology and analytics. One of the questions that often arises is, “Where should we start?” They want to know where they can get the greatest return on their efforts. Increasingly I want to tell them—perhaps a bit more diplomatically—the title of this post. Pricing, I believe, is the fastest route to ROI for many companies attempting to determine the next big thing to focus on.

Now analytical, automated pricing is not anything new in several consumer-oriented industries. Airlines and hotels have been pursuing price optimization (or, as they call it, “yield management”) for almost two decades. Financial services firms have devoted lots of efforts to it as well; in that industry it’s called “underwriting.” Banks and insurance companies have been working for a while on making underwriting more automated, and most large institutions in the US have largely cracked it for personal loans and policies. Retailers are rapidly adopting price optimization approaches. But these are all consumer markets.

The area of pricing that was stubbornly immune to technology and analysis—until now—was in B-to-B markets, where salespeople have long had a very high degree of pricing autonomy. It was the last bastion of pricing as art. I’ve been working with a relatively new company called Zilliant that helps B-to-B companies optimize their pricing; PROS (pricing and revenue optimization software) is another company doing interesting work in the pricing space. In the course of preparing a presentation for Zilliant customers next week, I’ve been researching the experiences companies have had with analytics-driven pricing. The improvement in margins they’ve seen pricing is very impressive. Yes, Zilliant is a client and you should take that into account as you read this, but I was impressed by what I learned.

For example, Parker Hannifin is a Cleveland, OH-based global industrial products firm with over $10B in revenues. The company specializes in motion and control technologies and systems. Historically, Parker’s pricing was based on “cost plus 35%,” employing little analysis about customers or markets. But when Don Washkewicz became Parker’s CEO in 2000, he concluded that the company’s pricing approaches were suboptimal at best. He began to investigate pricing alternatives, and hired Dick Braun from General Electric as Vice President of Strategic Pricing—the company’s first senior pricing executive. Braun began to explore ways to employ data-driven and analytical pricing approaches at Parker. He eventually developed a segmentation approach to the company’s 800,000 parts based on how unique the product was and how much competition there was in producing it. After initially developing his own pricing database, he implemented pricing software that uses historical data on pricing to recommend optimal prices to the sales force, and is integrated with the quotation process.

The new pricing approaches have been remarkably successful at Parker Hannifin. The company credits its new pricing approach with $200 million in operating income increases. Net income went from $130 million in 2002 to $673 million in 2006, and return on invested capital tripled during that time. The company’s share price rose 88% from 2001 to 2007, compared to a 25% for the S&P 500 overall. Braun believes that further implementation of the pricing approach throughout Parker’s far-flung operations will only yield more gains.

I’m convinced that there are many other similar stories waiting to be told. Pricing, as any marketing professor will tell you, is the key to profitability. Even in B-to-B firms, making pricing scientific has a huge payoff.