Price Optimization

Price optimization is defined as achieving the highest sustainable prices for your portfolio of products across your customer segments and channels. This is often achieved through the application of advanced mathematical software and/or specialized software. The main focus is on understanding customer transaction behavior and predicting how customer segment demand will respond to price changes under various scenarios.

The main types of optimization are:

• Price: What are customers willing to pay for your product? Traditional price optimization is used by a variety of manufacturing and distribution companies to set list prices, discounts off list prices, and net prices.
• Promotion: How will you actively market and heighten a campaign to boost the visibility of your company and products? Promotion optimization is used to maximize the impact of temporary price deals to spur sales and product adoption.
• Markdown: Everyone loves a sale—how low will you markdown your product so it sells and is still profitable? Markdown optimization is used to manage trend based discounting to maximize profitability of a time based demand curve.

There are a number of considerations for you to consider when employing optimization initiatives:

• Type, quantity, and quality of data available
• Type of product being sold: configurable/non-configurable; long or short life-cycle
• Type of customer base
• Transaction mix: high velocity versus low velocity versus contractual
• Sales model, account management approach, and sales compensation
• Types of back office IT systems: pricing, data warehouse, order entry: centralized versus dispersed; degree of integration

Companies can add significant profitability through optimization strategies under the right conditions. However, while they are suitable for most companies, they are not for everyone and they are not a substitute for poor strategies, a lack of processes, or a clear value proposition. Your strategies, processes and value should be clearly defined and aligned prior to the start of any large scale optimization project. Also, one must realize price optimization is more than an IT project. Behavioral change is also an important issue to address prior to starting an optimization project. The behaviors you currently practice are the drivers behind your current price-performance.

Successful implementation of price optimization requires real expertise and must be integrated within your current framework. Here are some important considerations:

• Strategy is both internal and external: Determine how you will execute sales activities and promotions before examining price optimization. Part of strategy includes evaluating your competitors, how they price their products, and execute product promotions.
• Get everyone on-board: Identify corporate leaders and make them the example for employees to follow. Enlist management assistance to execute training and education so employees understand overall corporate strategy and how price optimization supports your company’s long-term goals and, by extension, their self-interests.
• Processes matter: Develop processes on how management and employees will implement the new pricing strategies. Offer on-the-job training and direction so employees are properly armed with the knowledge and tools to perform well under pressure, don’t let the exceptions destroy the processes.
• Systems: Without the proper systems in place, you cannot fully execute your optimization strategy. The right system includes both automated, such as IT, and manual systems, such as bidding projects, necessary to run your business.

Here are few ways in which price optimization can benefit your company:

• Increase margin and revenue—delivering the right price can improve inventory management and increase net income simultaneously.
• Align your products and company to market conditions—understanding the market and your competitors helps you compete more effectively and more profitably. Incorporate external market factors when creating your pricing structure.
• Precision and efficiency of price management—lets you look at your business and pricing practices holistically so you can more effectively manage costs, overhead and pricing. Research and a scientific price optimization model replaces instincts, which, while important, can be unreliable from day to day.
• Complete pricing lifecycle determination and execution—accurately forecast and predict optimization models that drive market growth.

Sustaining benefits over the long term required ongoing focus as well. Optimization allows you to extend your capabilities and ensure pricing gains over the medium- and long-term. There are several key considerations to examine to insure you are staying on course, which is a long way of saying the learning never stops. Some considerations:

• Continue to refresh and/or extend your customer base to broaden your market reach.
• Integrate your analytics and pricing strategy with your supply chain, procurement, engineering, R&D, and CRM systems and processes.
• Modify your reporting and key metrics along the way to create and distribute new knowledge within your organization.
• Integrate value management processes and market pricing into reporting and optimization systems, especially at the front end of product design/launch cycles.
• Use a holistic customer approach based on share of customer wallet and market basket strategies.
• Broaden and deepen your customer knowledge, business processes, and models to leverage your knowledge to create more value for your customers.
• Expand and strengthen your relationship with the sales team to increase their success and compensation.
• Adapt your strategies as you gain new insights and capabilities.

Price optimization is a powerful profitability tool in the right hands. Transcend leverages its practical, hands on experience, to ensure you are ready and able to take advantage of this tool. We support all phases of assessment, strategy preparation & integration, RFP generation, vendor qualification, and vendor assessment. Contact a Transcend representative today for a free consultation.