Stop leaving money on the table - find the perfect balance of profit, revenue and customer demand with pricing optimization 


Download the case study for European DIY retailer

Black Fridays, Cyber Mondays, Season sales, this week’s promotions and tomorrow’s special offers.

Customers are all the rage on different campaigns and sales.

That translates to a simple thing: Retailers’ worlds revolve around campaigns and pricing.

The more attractive pricing, the higher the volumes. At least so it seems at the outset.

But at what cost? 

 

Price elasticity determines the optimal price

Pricing has not lost its relevance as a competitive factor. Quite the contrary. Transparency brought by digitalization has further increased the importance of pricing.

Price elasticity tells how sales of a product changes as the price changes.

When price elasticity and price images are known product and service prices can be set on an optimal level to maximize both customer traffic and campaign profit.

Targeted and profitable pricing closely involves monitoring of competitor prices that together with optimization provides improved profitability even on the short term.  


Case example – discount retailer
Discount retailer with some 150 stores wanted to improve their price setting process. They assumed that they are selling certain products with too low prices whereas some others might be too expensive compared to the competition.

With price optimization the retailer gained understanding on individual products’ price elasticities as well as competitor pricing.

As a result the retailer could see which products had to be sold with reduced prices and which products’ pricing could be increased – despite of the competitors’ actions.

 

How price elasticity helps in pricing optimization - Houston Analytics

How price elasticity helps in pricing optimization. 

Pricing strategies optimized by data science

Generate effective promotional strategies, price points and tactics by category down to individual SKU’s at scale

Compare pricing scenarios and enhance understanding between financial impacts, competition, customer perception and reactions

Apply pricing effects to improve forecasts, planning, execution and measurement of campaigns & promotions 

How do you use price optimization? 

Typically price optimization is used to optimize assortment pricing – that is setting optimal prices for a total assortment portfolio – or optimizing campaign pricing.


In both cases you want to find answers to two questions: what categories are most price sensitive and what SKU’s have strongest price elasticity.

 

Assortment price potential is based on identification of non elastic products, Gross sales of non elastic products and profit increase based on increased price. 

Campaign price potential is based on identification of price elastic products, campaign sales, average lift of the optimal price levels of elastic products 25% and the profit increase is based on increased sales. 

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Frequently asked questions

 

 

What is Price Elasticity?

The Price Elasticity of Demand (PED) is the % change in quantity resulting from a 1% change in price holding all other factors constant.

-|PED| > 1 means the good is elastic. Changes in prices have a large impact on quantity sold. Good has many substitutes such as different brands, butter and margarine, coffee and tea
-|PED| < 1 means the good is inelastic. Changes in price have little effect on quantity sold. Good has few substitutes but they are things we can’t live without such as electricity, gas, drugs. 

What data is required for price optimization?

Minimum data set includes receipt row data containing all purchase information, product master data with all product information and product hierarchy levels with product hierarchy information. 

It's also noteworthy that in order for price optimization model to work, individual products have to have multiple price points in its historical data. 

 

Can competitive pricing information be used for price optimization?

If you want to use pricing as a positioning tool then yes, you absolutely need to benchmark to market prices.