The New Frontier Of Price Optimization (Guide)

Price optimization is the process of finding that pricing sweet spot, or maximizing price against the customers willingness to pay. Pricing is a core strategic component in retail, influencing not just the company's profitability but also brand image and customer experience.

Price optimization is at the root of the force needed for profit generation in retail. The backbone of retail pricing analytics is science, which is used to price items correctly without the need to discount them.Price optimization utilizes analysis of big data to predict the behavior of potential buyers to different prices.

Companies use price optimization models to determine pricing structures for initial pricing, promotional pricing and discount pricing. Price optimization uses calculations to visualize how demand varies at different price points and combines that data with cost and inventory levels to develop a profitable price point for that product or service. 

This model is also used to evaluate pricing for different customer segments by simulating how targeted customers will respond to price changes with data-driven scenarios. Price optimization starts with a segmentation of customers. A seller then estimates how customers in different segments will respond to different prices offered through different channels. 

Given this information, determining the prices that best meet corporate goals can be formulated and solved as a constrained optimization process. The form of the optimization is determined by the underlying structure of the pricing problem. Understanding pricing at a finite level is a prerequisite to understanding the sensitivity of price changes. It is one of many variables that can be used to estimate the elasticity of demand for each product.

What Are The Components Of Effective Price Optimization Model?

Cost Models - These predict the net claims and other costs for customers.
Competitive Management Analysis - This provides an analysis of the market in which the company operates.
Customer Elasticity Models - These reflect market competition and customer behavior in order to predict volume of new business and renewal rates for customers at different rates.

Price Optimization Models can be used to tailor pricing for customer segments by simulating how targeted customers will respond to price changes with data-driven scenarios. Given the complexity of pricing thousands of items in highly dynamic market conditions, modeling results and insights helps to forecast demand, develop pricing and promotion strategies, control inventory levels and improve customer satisfaction.


How Price Optimization Models Work:

Price Optimization Models should factor in three critical pricing elements: pricing strategy, the value of the product to both buyer and seller, and tactics that manage all elements affecting profitability. Practitioners should:

Select the preferred optimization model, and determine desired outputs and required inputs;
Collect 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;
Clarify the business’s value proposition and set strategic rules to guide the modeling process;

Load, run and revise the model;
Establish decision-making processes that incorporate modeling results without alienating key decision makers;
Monitor results and upgrade data input to continuously improve modeling accuracy;
Understanding the customer and how they will react to a specific price point is of vital importance in price optimization.

Zara is notorious for their lack of advertising. However, their shelves are re-stocked as fast as in a couple of weeks from when the items were first put out because, they focus on producing what consumers want, while using what they save on advertising to pay the higher rates of work in Spain, which is another crucial aspect of the brand. 

Their sales don’t depend on discounts. With proper forecasts, they’re able to make a supply chain that will be the most beneficial to the business.With that said, how do you determine the best price for each of your products at any given time?

The answer lies in data. There’s a good chance that you and your competitors have comparable inventories. This means that if you’re missing an item that a shopper wants, they could just click over to your competitor to get it all in one order. Also, it means that their prices matter a lot. Shoppers love to compare prices, so your relative prices compared to your competitors’ are especially important.


How To Optimize Pricing

Pricing is one of the trickiest parts of online retail. Why? Well, not only is pricing hard to get right the first time, but it is also difficult to make sure it keeps up with the dynamic marketplace. Set it too high and you could drive shoppers away. Set it too low and you leave potential profit on the table, along with creating a customer base that is used to deep discounts.

You already have a lot of the data that you need to implement a pricing optimization strategy. Who are your customers and how much are they willing to spend? You can test the price elasticity of certain products that you’re introducing to the market. Pinpoint your most valuable customers and let their buying behavior influence your pricing.

However, before you get ahead of yourself, make sure that repricing will never cut into your costs. Setting a minimum price puts you in control of your pricing. Some other retailers, especially Amazon, have the ability to consistently cut prices and operate even when they are selling items below cost. Your price floor makes sure that you never do that--unless that’s a part of your strategy.

Strong pricing strategies start with strong data and most importantly, analysis of that data. How many products sell at which prices and at what time? At what price point is revenue or profit maximized?

Each time you change prices, mountains of data are produced and it contains golden insights. Therefore, pricing response time is key. Did you know that Amazon reprices as often as every 10 minutes? That’s why many online retailers choose to automate the process. Automation keeps retailers optimized around the clock. The market changes quickly and your pricing should be able to keep up with it.

No retailer wants to be pulled into a price war. It kills profit margins and presents an inconsistent brand image to shoppers. There’s a fine line between succeeding in online retail and being mediocre. Being uncompetitive or losing sight of the competitive landscape for even a short period of time can lead to a significant decrease in sales and profit.

With the proper analysis of the manner in which consumers spend, businesses are able to make the most revenue in each situation. Moreover, looking at how an item did based on its previous time on the market is no longer useful since there are a number of factors that influence it today.

With the help of both planning the optimization of prices, the prices of the methods will be allocated to specific pricing strategies and additionally, they’ll be put to work automatically. Therefore, both consistency and cohesion are guaranteed for the pricing strategy which helps with the management of the entire category development.

Companies up and down the supply chain, both in B2B and B2C settings, rightly dedicate a massive amount of time towards price optimization to ensure that their products will sell quickly at the right price while still making a decent profit. Thus, if an item is priced too high, it may not sell at all, while if the price is reduced too much, the business will not make a profit.

Businesses use price optimization formula based on the overall demand for their product, their level of competition, and (in the case of manufacturers) the cost of manufacturing their goods. Finding the perfect balance between profit and value is essentially what price optimization is all about, and because the relative values of goods and services constantly change, this is a never-ending task for most businesses.

Until fairly recently, price optimization has been restricted primarily to certain industries that have limited inventory, such as airlines and hotels. However, thanks to the growing availability of internal and external data, advances in machine learning, and increases in computing speed, price optimization can be applied more broadly.


Why Should E-Commerce Companies Focus On Price Optimization?

Pricing strategies have to be considered as one of the most crucial growth efforts for e-commerce businesses in order to maintain a healthy and sustainable business life. Depending on industry or scalability of your business, you should apply various effective pricing strategies and focus on continuous price optimization.

Pricing your products on a monthly basis or leaving them fixed will definitely have an impact on diminishing in conversion rates and customer numbers. Having different pricing strategies towards different scenarios in your pocket helps you to improve your financial health and performance in an ultra dynamic industry- e-commerce.

So why should e-commerce businesses focus on price optimization?
Most of e-commerce companies try to keep the product prices as low as possible to win the best deal game. So, increasing prices at small percentages such as %5 won’t change their lowest-price position. In these cases, you can consider increasing the prices in order to test online shoppers’ reaction. 

If your offerings don’t satisfy online shoppers’ expectations, they won’t hesitate to leave your store for a competitor in seconds and your competitors are eagerly waiting to welcome them. On the other hand, setting low prices doesn’t always mean a winning move. It is acceptable to lose some of your online customers if you decide to keep product prices on a certain level. 

The good news here is, that move will likely lead you to win loyal customers who will purchase more than once. Try to focus on loyal online shoppers who are willing to continue purchasing from you even when you keep product prices high compared to your competitors. Competitive intelligence software is useful to monitor the market and your competitors. 

By using these software, you can effectively gather the data of competitors’ prices. So that, you can identify the promising categories and increase the prices while keeping your competitive position. In e-commerce, you never guess your costs. There are many fluid reasons that affect the unit costs.

Let’s give a brief summary of these factors; the major slice of your costs comes from the supplier – the price that you pay for products of supplier. Aside that, we can count marketing, staff, inventory costs as overhead costs. As supplier costs are the big portion of your overall costs, it will be a wise approach to try decreasing the supplier costs as much as possible. 

Supplier costs depend on two different factors; purchase quantity and negotiation with supplier. The explanation of the correlation between quantity and costs is simple. If you buy a high amount of product, the unit cost of each product will decrease. But, the negotiation with supplier is much more unpredictable and depend on various circumstances such as the power of online store in the market, supplier – retailer relationship, etc. 

E-commerce companies should prioritize decreasing the costs by finding a solution to balance these two factors. In order to minimize the overhead costs, you should continuously try to optimize and automatize them.

So, competitive pricing strategy gains importance while competing in dynamic landscape. Monitor your competitors’ pricing actions, convert them into actionable insights and test how your pricing decisions will be perceived by online customers. As mentioned at the beginning, having constant product prices will be the most harmful decision for your e-commerce store. 

Not only you’ll have difficulties in acquiring new customers, the profitability will also be stuck down. By adapting competitive pricing, you’ll have great flexibility towards various scenarios happening in dynamic market. To conduct this strategy, you’ll need some competitive price intelligence. 

Competitor price tracking software is seamlessly efficient to generate actionable insights and helps you to take accurate pricing decisions. By acquiring competitor price tracking software, you’ll expand the opportunities of boosting sales and profit margins. In order to get this competitive advantage, e-commerce companies should separate a significant time to price optimization.

With charm pricing, you can target the psychology of customers in the best possible way so that they end up making a purchase. When retailers are effectively using this strategy it boosts up the sales and improves the conversion rates at an alarming rate.

What Are Charming Price Codes?

Well, they are nothing but the commonly seen price tags like $ 2.99, $ 3.99 etc. Yes! Even studies have shown that the prices which end with $9 are generally perceived as smaller.When customers believe that this kind of price is lower than the whole figure of $4 or $5, they start feeling happy and get subconsciously persuaded about the fact that they bought something for a perceived larger savings than the actual.

Behavioral pricing is also a unique and new concept related to e-commerce platforms. This kind of pricing lets you decide the best prices for products based on how prospective customers are behaving online. Now, the question that arises is, how can you identify such behaviors?

Do A/B testing of pricing across a wide range of mediums then analyze the online data (such as browser search history, social network engagements, and click-paths of online shopping) to find out which prices increased the targeted behavior. By applying those price to your site, you should be able to raise conversions. It is in the best interest of your business to continually A/B test your pricing to see if you find an option that is more profitable.

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