What tools do the most successful firms use to set prices in order in favor of price optimization?
The largest firms in the world spend millions on outside analysts, consultants, and poll professionals to develop pricing strategies and tactics. They have the economy of scale and the resources. This tradition continues today, but with a twist. It’s a big-data driven world, and we now know that the answers to effective product pricing lie within your own historical data. In fact, a handful of special niche pricing programs have sprung up since the early 2000’s to address this issue. Most if not all of these programs are designed for the billion-dollar market and are simply out of reach for the rest of us. Each solution has a different take on pricing analysis, depending upon the founders’ ideas and the companies that they were created for. Within a few years, most companies – large and small will use some sort of price optimization.
Who is setting your prices, you or your competition?
Is it more effective to look at your own data versus (for example) following pricing that competitors put out there? Ask yourself this question: When was the last time your competitor shared with you their tactics and strategies? Never? Do they call you up regularly? Unlikely. The only metric you have to rely on is the price that they put out there. How they arrived at it is anyone’s guess, so following competition has some issues, and will likely lead to dwindling profits over time.
Internal facts versus competitor fiction
Relying on internal metrics, versus guessing why your competitor priced the way they did is powerful. You can guess, but have little facts or truths to address why your competitors price the way they do. On the other hand, you know exactly how customers respond to your product pricing. Or do you? Obtaining a complete picture to determine how your customers view and value your products is difficult. It is also among the most important and profitable improvements you can make in your organization. Those analytics become valuable influences to price-decision making. In summary, organizations that price to internal analytics are executing value based pricing.
Value based pricing
Value based pricing is the act of understanding how customers view the value of your products and monetize that value into effective pricing decisions.
Measuring value
To deal effectively with product pricing, one first must gain an understanding of what drives its value. How does that translate into effective pricing? Products exhibit certain behavior patterns on multiple levels. Behavior patterns can be difficult to measure.
Setting the table
Measuring product behavior must occur before determining what drives value. Here’s an analogy; When we set the table for dinner, we place the largest plates in the middle, silverware a certain way and glasses in a particular spot always. Once the table is set, now we can eat. Pricing to value is the same concept, but the “table setting” is a current measurement of how well or how poorly an individual SKU is doing in multiple areas of concern to the organization. How well a product moves and how profitable it is are but two of dozens of data points and measurements of performance to consider. The more data points, the better and more accurate the pricing will be for both company and customer.
Data points = Higher Profits and more revenue
When a product sells well, the message could be that customers value it highly. Sometimes so much, that it is an indicator that the price can be moved up. Combined with other data points it could indicate something entirely different. If products are moving slowly, it is difficult to know exactly why without additional data points. If products are difficult to get from the supplier, this brings new meaning to why the product does not sell well. The more data points, the more intelligently targeted the pricing will be.
The future is here, now
These examples present a strong case for price optimization software. It is nearly impossible to measure, assemble, analyze, and finally apply all the data points within an organization without effective pricing software. With the right analytical tools, you can measure the true value of every product. Executing sound, confident pricing decisions on a large scale often results in ever-higher profit and revenue. The old one-at-a-time price changes are fast becoming obsolete, as this method is impractical, unnecessary, and time consuming. Price is the most powerful lever one can pull in an organization. The profits, revenue and customer retention have been well documented (Deloitte, McKinsey, RSR, etc…). Value driven pricing is the future, and the future is now.
ABOUT THE AUTHOR
Dave Leonard is the CEO of Advanced Pricing Logic. He has over 30 years of executive management experience in multi-channel retail, distribution, manufacturing, and catalog merchandising. Mr. Leonard has extensive experience in the area of technology analytics as it relates to price optimization for the mass marketer, inventory control and optimization, purchasing optimization, and consumer pricing psychology.
ABOUT APL
At
Advanced Pricing Logic we are dedicated to designing innovative analytic software that makes our customers more profitable. Our software transforms data into insight and provides the platform to turn insight into action. Designed by business professionals, our software follows three guiding principles: encapsulate world class analytics, enable customers to take sound action through easy to use applications and ensure ROI less than a year after purchase.
photo courtesy of www.freedigitalphotos.net
