When the market becomes more dynamic, pricing has never been more important. In this blog we summarize 8 big challenges in pricing and we try to answer them with our thoughts.
1.Choosing the right pricing strategy
A price optimisation project is a major undertaking for any company. There are often multiple internal stakeholders, and it is likely to affect a wide range of internal systems and processes, from basic product management systems to cost and profit allocation and customer relationship programs. When done right, it can be one of the most profitable activities a company can undertake. When done wrong, the dangers are equally significant. To help you decide what the optimal strategy is, we have put the different strategies along the product life cycle.
Below you can find an overview of the pros and cons of the different pricing strategies. A description of the relevant pricing strategies can be found in our whitepaper of pricing. In reality, the pricing strategy for a company with an extensive assortiment will almost always be a combination between methods, and will rarely ever be just one. In essence, the methods refer to the various driving forces of the price.
2. When should I increase prices?
After you’ve decided the pricing strategy, there’s still room to improve your pricing. 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. To find out how to detect these leading products, you can read our blog post about it.
One of the most important factors is to detect the price elasticity of each product and customer groups to determine which products are leading and which products and which products can be experimented with to increase prices.
3. How much are customers willing to pay?
Testing the price acceptability of a product or service in comparison to the competition is the main principle of any pricing project. This aspect needs to be carefully considered, because the rules differ considerably according to whether the product is a commodity or customized. Speculation about a shortage of the commodity may have a dramatic effect on price.
A customer can also attribute a value to after sales service such as reliable/speedy delivery, quality, longevity as well as the brand. A strong brand gives the buyer confidence and enables companies to command a premium price even if the products are similar to the competition.
The link between prices charged and volumes sold is easy to understand; the difficulty arises when the question is asked : ‘with an X% price increase, how much will it affect our sales?’ A price increase may result in sales decrease, switching to a substitute product or a halt to buying your product altogether. On the flip side your company may be missing the chance to gain additional profit through charging more – it is all down to customers’ value perceptions and what they will pay. In order to make these decisions, it is crucial to get insights in price elasticity.
4. How to price different between channels?
Varying prices can be important because there can be a different value proposition per channel. Via the webshop, customers can opt for more convenience and offline for advice about the products. In B2B, your regular customers may also be rewarded with a higher discount percentage than new customers. It is therefore important to analyze which customers choose which channel and why to include this as an additional “driver” in a price optimization model. In SYMSON you can easily switch per channel to determine the optimal price.
5. How to commit all people to work more data-driven?
A price optimisation project is a major undertaking for any company. There are often multiple internal stakeholders, and it is likely to affect a wide range of internal systems and processes, from basic product management systems to cost and profit allocation and customer relationship programs. When done right, it can be one of the most profitable activities a company can undertake. When done wrong, the dangers are equally significant.
Dynamic-pricing skills are fundamental to stay ahead of the competition. But in our experience, tools and algorithms are not enough to capture and sustain significant impact. Companies need to put equal focus on people and processes.
In order to involve people in pricing, it is good to find out what their pains and gains can be to make them ambassador of data-driven pricing.
6. How to deal with bad data quality?
A significant challenge in price optimization today is data quality, because business data requires thorough cleansing and preparation to be used as input to any Analytics or Business Intelligence system. Also other sources of noise such as combining product groups with different price elasticities or neglecting seasonality or special events where demands are high and the offerings limited are crucial to know. Managers do not often have prior knowledge or skills to differentiate between bad and good data, but now they are suddenly equipped with AI tools for extracting competitive and actionable intelligence from piles of complex data.
In SYMSON we give every data optimization a data quality score. With a low data quality we advise on the possibilities to improve the data quality, for example by increasing the number of units sold for this item by varying more with the price.
7. How to execute good experiments?
Since every business — and, by extension, its customer base — has its own set of needs, it may take some trial and error for your company to discover a pricing strategy that perfectly fits with your business model. Even then, the need to innovate and continue building towards a brighter future for your business never truly dissipates. In the graphic below we’ve made a framework on how to set up experiments to understand your customer behavior and test your assumptions.
- Set goals e.g. “increase gross margin”.
- Ask a question (hypotheses) e.g. “Can we differ price among different stores/ locations? Can we set higher prices at stores with a lower competition and more attractive prices at stores with a higher competition?”
- Prioritize and scope: try to start with a few stores for a certain period (for example one month). Make clear that you compare situations with only one parameters different and the others equal (A/B testing). When there are many important parameters then use special testing protocols such as DOE (design of experiments). Conjoint Analysis is an example of such an experiment set up.
- Test the differences in gross margin between the different stores/ locations.
- Continuously analyze the results. Do we see patterns in all products or a selection of products? If we know that, we can start smarter experiments in the future.
8. How to visualize important price information?
Data visualizations make big and small data easier for the human brain to understand, and visualization also makes it easier to detect patterns, trends, and outliers in groups of data. Good data visualizations should place meaning into complicated datasets so that their message is clear and concise.
When implementing SYMSON we ask companies which KPIs they want to control and manage in the pricing process (such as margin, sales etc) to visualize this in the dashboard. In addition, we map important patterns of leading products to quickly detect which products are leading in customer behavior.
- The Challenge of Value, 2010 by Harry Macdivitt and Mike Wilkinson