Price Optimization: How Optimizing Your Prices Improves Revenue Generation
For years, C-Suite and B2B leaders have employed price optimization strategies to boost profitability and bottom lines. By optimizing prices, businesses can strike a balance between value and profit that plays a crucial role in generating revenue and long-term success.
Your business operates more efficiently and profitably when your product or service is accurately priced. However, understanding what your target audience is willing to pay demands time and effort. By dedicating time to contemplate your pricing strategy, its mechanics, and potential benefits, you can discover pricing solutions that improve profit margins and significantly transform the way you conduct business.
What is Price Optimization?
This pricing approach involves the analysis of customer and market data to find the optimal price point for a product or service. Businesses utilize this technique to determine the exact price point that will bring in customers and drive sales.
To properly gauge the optimal price for your product or service, you will need to understand topics such as:
- Demographic and psychographic audience data
- Historical sales data
- Customer experience data
- Operational costs
- Product inventory
- Competitive pricing data
This process is all about understanding who the best customers are, what features they value, and what features they need. Through historical data analysis combined with market intelligence, your organization can critically analyze customer and competitive insights and use that information to best optimize prices.
Price optimization is like dynamic pricing strategies that are commonly used in the retail and e-commerce industries. Dynamic pricing focuses on adjusting prices in response to changes in demand and market conditions, such as airline pricing, to maximize profitability. Pricing optimization focuses on optimizing price regardless of the level or intensity of market or customer changes.
Who Benefits from Price Optimization?
Deciding on the right pricing strategy starts with gaining a deep understanding of your customers and market. Regardless of which pricing strategy you employ, businesses can benefit from optimizing their prices if they experience:
- A large quantity of products, customers, or channels
- Varying types of product groups, end markets, or customer types
- Frequent cost changes
- High or variability in price sensitivity or elasticity
- A highly competitive landscape or a need to differentiate
- Volatile market conditions
- Need for demand forecasting
Organizations that deploy this optimization strategy experience benefits such as:
- Increased margins
- Higher price realization
- Decreased price concessions
- Data-driven pricing for new customers
- Competitive positioning
- Quick responses to market changes
Price Optimization Client Success Story
The Challenge? A professional field-services provider had a complex sales process that relied on sales rep intuition and manual pricing processes instead of customer and product data. Additionally, management did not have visibility to whether internal processes were followed, relying heavily on handwritten notes. This resulted in price mismanagement, such as sales inadvertently discounting high-tiered products to a lower tier.
The Solution? INSIGHT2PROFIT utilized company data and market research to build product positioning that accounted for key elements such as product features, market predictive factors, and desired customer behavior. These factors were embedded into a pricing model that powered a tailor-built application to facilitate all key steps in the sales process. This application was deployed across business locations to provide optimal product and price recommendations for sales reps in the field, with built-in sales enablement tools such as suggested questions and quote history.
The Results? $14M of margin impact due to price and product optimization. The businesses also saw increased close rate and upgraded measurement capabilities for ongoing improvements.
How Does Data Science Augment Price Optimization?
Modern optimization strategies take full advantage of cutting edge tools and methodologies such as data science to ensure pricing is as optimized as possible at any given time or scenario. There are a multitude of ways organizations can leverage data science to optimize their pricing ranging from predictive analytics to AI and machine learning.
Data science streamlines pattern detection to determine which path to follow in terms of optimal pricing based on your company objectives. Exemplary pricing organizations utilize statistical analysis and machine learning algorithms to surface patterns from previously collected data. This information is helpful when considering how the following factors can best be used for strategic pricing:
- Competitor pricing
- Seasonal variables
- Special events and holidays
- Economic variables such as cost, demand, or price elasticity
- Operating costs
- Warehouse data
Any of these areas could be important inputs for a price optimization model, and thus efforts to leverage data science techniques would enhance the output. For example, companies that heavily utilize raw materials in their offering are at greater risk of margin decline when cost changes are volatile. These organizations would benefit from predictive models that estimate expected cost to generate pricing or quotes that are optimized at the time of the transaction. This results in sales revenue that more accurately reflects actual cost at the time of the sale.
Data science is quickly becoming an essential tool that allows businesses to take advantage of collected data to drive results. Many pricing organizations are implementing to embed powerful algorithms into their pricing practices. The algorithms that utilize data science are an invaluable mechanism that help companies meet their financial goals by delivering the data-driven pricing insight they need to react to an ever-changing market.
When Does Price Optimization Go Wrong?
Oftentimes, companies lack the capacity to enforce a price optimization strategy effectively. The amount of customer and market research needed to determine the right price takes considerable time and effort. Instead of developing a well-thought-out strategy, companies tend to lean too much on guesses and “quick fixes” that might work in the short term but could fail to generate a lasting impact.
There are many common strategic pricing initiatives that management teams rely heavily on to kick-start growth, including:
- Special / one-time discounts
- Competitive price matching
- Volume-growth initiatives
- Waiving fees such as freight or payment terms
While all these pricing initiatives have a place in your pricing strategy and can work for short-term customer growth, relying solely on these programs can be detrimental to long-term success and profit growth. Alternatively, an optimization strategy that accounts for customer value, customer profitability, and market conditions delivers reliable, maximized price recommendations that help your business yield margin improvement for the long-term.
With a lack of value-based pricing, many companies simply guess at what an optimal price point is instead of turning to pricing analytics, metrics, and customer data. Guessing at your prices can work to an extent, but your growth is likely to stagnate and settle at “good enough.” You are likely to leave money on the table without the right optimization strategy in place.
Price Optimization Client Success Story
The Challenge? An aftermarket parts distributor was using cost-plus pricing and faced significant seasonal volatility with higher volume in the spring and summer. The distributor also had significant price variation, with ~50% of transactions receiving unearned discounts to grow volume off-season.
The Solution? INSIGHT2PROFIT transitioned the company to a list and discount pricing strategy. Then, we restructured list price groups through refined customer and product segmentation. We optimized price through discounting tiers that accounted for sensitivity factors such as competitiveness, cost changes, and seasonality. Last, we implemented pricing governance and a model review process to ensure continuous improvement.
The Results? 3% return on price through a list and discount optimization initiative.
What is the Best Pricing Solution for My Business?
Profit optimization is fast becoming critical for leading pricing organizations. While the math may not be straightforward to all, finding the right pricing solution that works for you will ensure you stay competitive in an elastic market.
At INSIGHT, we pride ourselves on being price consulting experts. Our specialists are uniquely positioned to offer comprehensive pricing solutions for sustainable profit improvement through strategic pricing, tailored pricing software, change management programs, and our continuous improvement techniques.
As an industry leader, we are committed to using data engineering, data science, and advanced market intelligence practices to improve our clients’ bottom line. We’ve worked one-on-one with hundreds of companies to develop innovative pricing solutions that enable them to stay competitive in today’s marketplace.
If you’re ready to see what INSIGHT can do for you, schedule a time to talk to one of our experts. Together, we can define your road to increased profitability.