3 Steps to a Better Price Optimization Strategy
According to a 2015 Bain & Company Insights report, “price optimization models are mathematical programs that calculate how demand varies at different price levels, then combine that data with information on costs and inventory levels to recommend prices that will improve profits.” However, the journey towards price optimization doesn’t begin with a mathematical program, it begins with humans.
Before retailers can begin inputting their SKUs and data into a price optimization program, they must first do the following:
- evaluate strengths and weaknesses;
- do more than just size up the competition; and
- define their pricing strategy.
Evaluating Strengths and Weaknesses
Retail management and pricing strategists must first take into consideration what effect SKU prices will have on operations and evaluate their organization’s strengths and weaknesses. This methodical approach of initially looking into ones own strengths and weaknesses is necessary to get a clear picture of which strategies are to be executed.
According to Bain & Company, this requires “collect[ing] historical data, including product volumes, the company's prices and promotions, competitors' prices, economic conditions, product availability, seasonal conditions, and fixed and variable cost details.” Using the data gathered, retailers can clearly outline their company’s strengths and weaknesses.
This holistic approach drives both value and self-interest. It initiates the wisdom and clarity of how pricing affects all aspects of operations and is a direct correlation to profits and revenues.
Don’t Just Size Up the Competition
When it comes to pricing, most retailers today still focus directly on the competition first vs. starting with an honest assessment of ones own strengths and weaknesses. But to truly achieve competitive pricing, retailers must assess the bigger picture, not just their competitors' prices.
Using price optimization metrics, retailers don't just size up the competition, they size up the competition against their own strengths and weaknesses, creating a list of opportunities and threats in the overall market.
That's a profoundly more profitable approach than comparing raw price data to the competition. With limited insight into competitive data and without knowledge as to how competitive data is going to affect profits and revenue, it's unlikely to yield better results.
Define Your Pricing Strategy
Once a company has evaluated its strengths and weaknesses and outlines the threats and opportunities based on the competition and market, it's time to define a clear pricing strategy. In order to select a pricing strategy that reflects a company’s culture and lays the groundwork for how the business will be perceived, retailers will want to consider the data and information they've gathered.
There are a number of pricing strategies to consider, including the following:
- Everyday low price: Big-box retailers often use this strategy to drive customer loyalty. The main goal is to offer customers a reasonable price on all of the items the business offers. Consumers benefit by not having to wait for a product to go on sale, and while a retailer might not have the lowest price for a particular product, loyal customers know that they can depend on certain retailers for the most reliable prices.
- Discount pricing strategy: Grocery stores commonly use a discount or promotional pricing strategy. With discount pricing your goal is to sell a high volume of product at promotional price. This type of pricing strategy can include a mix of promotions (e.g., seasonal discounts and customer reward programs). A successful discount pricing strategy requires a commitment to advertising your promotions and discount programs.
- Value-added pricing strategy: This is a strategy that retailers can use to compete with the online giants. With a value-added pricing strategy, retailers don’t have to offer the lowest price, but can entice customers with added incentives to purchase a product with one retailer vs. the competition. This could include free shipping, delivery and installation or an added warranty or service package.
It’s 'Go' Time
Once a retailer has evaluated its strengths and weaknesses, done more than size up the competition, and defined its pricing strategy, it can turn to pricing optimization software to help with the heavy lifting and define the optimal prices to help SKUs sell and profits to increase.
While price optimization is by no means a new concept or business objective, today’s sophisticated data analytics software allows retailers, no matter their size, to reap its benefits.
Dave Leonard is the CEO of Advanced Pricing Logic, a price automation software provider.