Price Optimization Explained: Tips & Tricks
It seems like a well-known fact that the price is the single most important factor for consumers when making a purchasing decision. A study by NPD has shown that the price is the key in deciding for even 85% of the customers. However, many business owners still don’t invest enough time and energy in price optimization despite these well-known numbers. What most of them do is just copying the prices of their competitors or guessing in the dark. If you are one of them, this post will be perfect for you.
In the following paragraphs, we will explain what price optimization is and which types of price optimization exist. We will then give you some valuable tips on how to optimize your prices for the best!
What is Price Optimization?
Pricing optimization is the practice of finding the optimal price, based on market conditions and consumer data. The idea is to maximize profitability by making a knowledge-based decision about the price point.
In the past, this practice was almost unimaginable for most businesses. This is a complex decision that should be made based on many factors, and only big businesses were lucky enough to afford that kind of data gathering and calculations. Truth be told, pricing optimization in today’s sense was unnecessary for small businesses – all they had to do was focus on their local competitors and local customers. Nowadays, with the rise of eCommerce, focusing only on local factors is not enough – luckily for the small business owners, as the eCommerce industry developed, so did the tools that can help with price optimization.
We already mentioned that price optimization requires some serious web scraping and data gathering. So, what are the most important information required for the process?
- Historic sales data
- Customer behavior data
- Demographic data
- Operating costs
- Demand
- Inventory
This list is not definite. Depending on the industry, there can be much more information you can and should take into account when doing the price optimization.
Types of Price Optimization
There are four main types of price optimization:
- Single product pricing – calculating a demand curve for every product you are offering. The idea is to use the demand curve for predicting quantity sold at every price point, which can help you create a demand required to clear your inventory. You can also use the demand curve to set the profit-maximizing price and discounts for promotional pricing
- Reaction pricing – as the name says, it’s the kind of competitive pricing where you react to the price change your competitor makes. However, simply matching with the discounted price of your competitor’s product can backfire and you can lose some customers looking for some higher quality products with higher prices. The other danger is entering a price war, which could be very harmful to your revenue.
- Multi-product portfolio pricing – doing the first two types of pricing optimization is easy for a smaller number of products, but for bigger numbers of related products, you might need to consider a multi-product pricing strategy. This type of optimization makes small increases and decreases in prices of related products keeping the average price the same. This ensures that the increased profitability from the customers willing to pay more is greater than the loss from customers who are going for your cheaper products. This way, you also avoid product cannibalization which can happen in the single product optimization, where you would optimize only one product but cannibalize others.
- Strategic pricing – this is the type of price optimization where you would try to make your pricing policy match the customer’s perception of the unique value that your brand can offer. This is also a type of multi-product pricing but it is different from portfolio pricing since it involves changing all products pricing in a product line by the same amount.
How to Optimize Prices?
As we already mentioned, price optimization is not an easy task, and it includes a lot of intelligence work. However, we can separate the process into a step-by-step list, to make it easier to grasp the concept and start optimizing your prices.
- Learn about your customers – at the end of the day, it all starts and ends with customers, after all, convincing them to buy your product should be your ultimate goal. So, how can you do anything without knowing how the customers feel. In this case, you want to know their willingness to pay for your product or service. You should try to learn if your customers are bargain hunters or early adopters. Do they care more for quality or the price, etc.
- Analyze the data – Now that you’ve gathered the data, you need to do something with it – analyze it and give it a context. You should look for patterns in customer behavior, check for correlations, and learn what influences what. It’s different for every industry, even for every business and this is why you should not rely on someone else’s findings and conclusions but instead try to come up with your own.
- Adjust prices – this is the crucial step. Now that you’ve gathered data and gave it a meaning, you should use the findings you got, to adjust your prices accordingly. As we already said, there are a few types of price optimization, so you should pick the one that suits you best.
- Monitor the results – it’s not done once you adjust your prices! This should be just the beginning. Now you have to give it some time and pay attention to the results it’s binging. Price optimization should be an ongoing process, by doing the first three steps correctly you will set the basis of this process. After that, you need to monitor the reaction and do necessary adjustments where needed.
This step-by-step is not a straight path – it’s rather a circle. You should never stop with data gathering and analyzing it because things can change very quickly and you want to be prepared as much as possible for that moment.
Don’t Guess in the Dark
Pricing optimization is a long and demanding process. Doing it manually can be extremely time-consuming and in some cases, it is practically impossible. Using a pricing intelligence tool for gathering and analyzing data, as well as for repricing can be of great help. Without such a tool, this process will end up more like guessing in the dark. Price2Spy is one of the leading software that can help you with all of the steps mentioned above. Don’t hesitate to try it free for 30 days and see all the benefits!
