No More SKU Blues: Why it’s Time to Embrace Price Optimization
“What’s the difference in sales for a package of nails priced at $5.95 vs. $6.50?”
“Will the increased margin offset any dip in demand if I raise the price of this bottle of wine by 20 percent?”
Wholesalers need to be able to answer questions like these to stay profitable and competitive in an omnichannel, customer-centric sales environment. Inventory planning and price optimization are two sides of the same coin for wholesalers, especially as they work to meet complex, changing customer demands.
In a 2020 wholesale distribution supply chain survey conducted by Blue Ridge, three in four wholesalers said managing increasingly volatile demand is their biggest challenge. For many of them, outdated forecasting methods are a major culprit, making it difficult to understand and predict customer buying patterns. A technology-enabled approach to inventory forecasting is critical for effective planning, but inventory is just one piece of the puzzle. Price optimization is an equally important tool for bringing demand to the right level and maximizing profitability — every time.
Why Price Optimization Matters
Incremental shifts in price can have a big impact on your bottom line, with a 1 percent price change potentially creating a 30-percent change in gross profit for certain wholesale items. Some markets, like the hotel and rental car industry, have long understood the difference that changing rates by just a few dollars can make. Now, this type of price optimization used in price recommendations and forecasted financial impacts is knocking on the door of wholesale and retail channels as well.
Retail e-commerce sales continue to climb, growing three times faster than overall retail sales to reach $155 billion (11 percent of all retail sales) in the third quarter of 2019. As a result, organizations are finding that more items that are deeply embedded in their product assortment are price sensitive. Despite this shift, however, many companies are still relying on formulas like wholesale markup to price goods, rather than determining the price the market is actually willing to pay. The result? Underpriced items that leave money on the table, and overpriced items that can turn into lost sales.
By marrying inventory demand planning and price optimization in a single platform, businesses can balance price and profits based on real-time data. Using factors like minimum advertised price, psychological price points and willingness-to-pay measurement, as well as macroeconomic influences, these tools can help wholesalers and retailers test the financial outcomes of price changes before they even make them. Here’s how a price optimization platform can help your business maximize profit and minimize losses:
- It takes all internal and external factors into account to set prices. Segmentation is critical in pricing. Prices can — and should — be set differently based on the product category, the channel that it’s sold in, the target customer, and even the time of year. Using data science and predictive analytics, a price optimization tool can help you test different pricing strategies and see how they’ll impact both short- and long-term sales. That type of insight is helpful for reacting quickly to changes, as well as planning inventory for the upcoming season or year. For example, if you know a proposed tariff will likely apply to some of your products in the coming months, you can bake that directly into your pricing strategy. Taking these factors into account makes your pricing more accurate and competitive. Digital tools make this type of real-time analysis possible.
- It optimizes pricing across more products. Businesses with a wide assortment of inventory often spend precious time fine-tuning pricing for top-tier items, while others get neglected. A Deloitte study revealed that using analytics can reveal duplicate items and significant hidden, nonvalue-added costs when it comes to managing SKUs. The study analyzed a leading maintenance, repairs and operations (MRO) distributor with 73 unique SKUs, finding that just eight of those SKUs were responsible for 55 percent of unit volume at a higher margin than the remainder of its product line. In addition, customers appeared to be totally indifferent to many of the qualities responsible for prompting the creation of these additional SKUs. Examples like these demonstrate the importance of analyzing products across the portfolio to uncover hidden pricing, cost reduction, and revenue opportunities. By putting a system in place and collecting data on pricing and sales, your platform can learn over time to predict the impact of price changes across your assortment with greater accuracy. That means you can fine-tune prices across more of your lineup, while potentially finding pricing isn’t as sensitive as you once thought for top-tier products. Most importantly, you can identify underpriced and overpriced products sold in different channels, quickly highlighting profit opportunities.
- It can help perfect your pricing for each customer. Just as pricing varies across products, it can vary across customers, too. You may be surprised to find that Customer A is sensitive to an incremental price change, while Customer B is unaffected. For example, one industrial distributor that sold to an offshore oil rig company found that the customer was totally insensitive to price changes for a commoditized product — the organization simply wanted the product quickly and reliably. Armed with that insight, the distributor was able to reduce discounting, improve margins, and appropriately stock these products for improved service levels to this customer segment. In addition to optimizing published list prices, best-in-class price optimization tools also enable you to predict the ideal price for customer segments or individual customers at scale, resulting in greater potential for profitability.
- It can help you gain the upper hand in supplier negotiations. When it comes to supplier relationships, don’t let the tail wag the dog. Suppliers often dictate prices based on the cost to manufacture the product, correcting overstock conditions, rather than what the market is willing to pay. Pricing tools enable you to take a value-based approach, helping you determine optimal prices by product and customer segment, then negotiate margins and costs with your vendors that meet your mutual financial goals.
Pricing to Perfection Starts With Technology
Inventory forecasting and price optimization go hand in hand in demand planning, helping wholesalers avoid unwanted surplus, stock-outs and surprises. Combining these tools can help you gain the insight to pivot quickly when needed while shaping longer-range sales and operations planning (S&OP), resulting in pricing that’s both competitive and profitable.
Cliff Isaacson is executive vice president of product strategy at Blue Ridge. Blue Ridge Pricing delivers advanced science and calculating power to test the impact of a price change across your entire assortment.
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