In 2002 Hewlett-Packard Co. unseated long-entrenched Sun Microsystems Inc. as the largest supplier to the server market and has managed to hold onto that spot ever since. How did HP do it? Simply put, it got its prices right.

The year before dethroning Sun, HP's CFO Robert Wayman made pricing one of his top initiatives for delivering shareholder value. But Wayman's plan to use price to drive profits was almost thwarted by HP's internal pricing systems, which he soon discovered were woefully inadequate. Back then, pricers extracted pricing decisions from spreadsheets detailing thousands of computer components that can be combined into as many as 10 billion different configurations. Each possible configuration must be priced correctly. And, given that the products have short lifecycles, right prices–if they are indeed right–quickly become wrong prices. The managers who set HP prices often relied on their gut instinct or were reacting to competitors' moves. When a so-called "guru" pricer was promoted or moved on, HP would be stuck. With Wayman's initiative as impetus, managers like Mark Hillstead, then the controller at HP's Unix server group, went to work to fix the system. The Unix server group, which is part of HP's North America enterprise systems division, builds computers for companies, universities and governments. Hillstead worked with San Francisco-based Rapt Inc. to phase in the Rapt Price Director, a tool that helps companies calculate profits and market share using elasticity models generated from reams of actual order data. The software helped HP unlock its customers' true willingness-to-pay on every order. "The benefit to HP was immediate and measurable," says Hillstead, who is now the corporate director of finance. Although in a recent interview he declined to quantify HP's gain, at a presentation at Stanford University two years ago, Hillstead had said that better pricing decisions allowed the unit to achieve a 1.4% increase in net revenue.

Tool Proliferation

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