Maybe you are the person in your organization who is responsible for price optimization, but you are struggling or your head is spinning while analyzing all these data sources. Maybe you have hired consultants to analyze the current price strategy, but you are still in the same situation that finding the optimal price is a complex job. In this blog we explain how to improve your gross margin without losing customer loyalty.
Executives want to avoid a race to the bottom; the self-defeating exercise of trying to beat every competitor’s price on every item. Each pricing decision can require a trade-off between margin and customer loyalty (or price perception). To avoid the race to the bottom, savvy companies identify leading products or Key Value Items which are the products (and their related prices) that customers tend to remember. If a company can do this accurately, it can price those specific products competitively while charging relatively higher prices (and earning more margin) on other products.
This Makita Drilling Machine can be leading in the buying behavior of a carpenter. If the customer wants to get a first impression of the market price by searching on Google, he finds a list of potential suppliers of this drilling machine.
In this list the second option offers the lowest price. If you as a company do not come close to this price, the price for your products is out of the market. This can lead to a negative price perception with your offer. Moreover, every company knows that he does not need a Makita drill every day, but he will purchase other supplies such as parts of the drill or other accessories more frequently.
As a roofer you need roof tiles every day. So you prefer to go to a shop that offers competitive prices (price perception) for the roof tiles. In addition to the roof tiles, you also regularly need garbage bags, tarps, foil and ropes etcetera. Of course, stock position and service are also important buying motives, but in this example we assume that this is the same for every company / shop.
It is interesting to find out which of the products is leading in this customer behavior. If these products are priced competitively and the other products are relatively higher, the total yield (gross margin) can be improved. For companies with many transactions, a large number of customers and thousands of price-product combinations, it is a labor-intensive, therefore almost impossible task to do this manually.
Two types of products
Broadly speaking, products can be classified into two groups:
- Leading products: a product that stimulates the price/ value perception for customers and leads their buying behaviour
- Led products: products that have a low share of orders, but are purchased together with the leading products. These products are less price sensitive than leading products.
These items can identified by a score based on three criteria:
- Order frequency; items that are often included in baskets could drive price perception.
- Average price; the higher the price, the more likely the price is remembered.
- Price sensitivity or price elasticity; to determine this value there needs to be some price variation in the transaction data. If you want to know more about price elasticity, you can read an another blog.
If we combine these three criteria and rank these products, we get a list of leading and led products. Yet, despite the importance this identification, many companies still lack a systematic, fact-based process for doing it. Some companies rely almost entirely on the commercial intuition of experienced category managers.
In today’s data-rich business environment companies can—and certainly should—go beyond their intuition. To accurately identify leading products, and to continuously update these products, companies tap into the treasure of transaction data and (possible) competitor data.
SYMSON (acronym for Smart Yield Management Software) can help you easily identify these leading products, advises optimal prices for the leading (and led) products and automate the time intensive pricing process.
Our sophisticated methodologies and algorithms enable you to analyze billions of transactions and hundreds of gigabytes of data. Harnessing the power of advanced analytics to improve price perception can have significant impact: a margin boost of at least one to two percentage points, with steady or even increasing sales volume.