Price optimization is often the most effective way to improve the bottom line. When a price is improved by 1 % it simply leads to a more significant outcome compared to a 1 % costs reduction or a 1 % growth in turnover. And if the prices haven’t been optimized recently, besides the annual indexation, there are good chances of improving your bottom line significantly by optimizing prices.
Price optimization for consumer products
The way to optimize prices varies depending on the characteristics of the company, the product, the customers and etc. When it comes to consumer products, especially groceries, a price optimization can be achieved throughout transaction data and sales modeling. However, this is often a time-consuming and costly way, and the history within dynamic markets are not necessarily a good benchmark for the present state of a market.
Alternatively, the price optimization can be achieved by conducting a market analysis. In this regard, the Van Vestendorp method is often used to optimize prices due to the fact that it is simple and cheap, but unfortunately it rarely gives credible data. Consequently, you are advised not to use it. Instead, the most optimal way is to use a choice-based conjoint analysis, which any expert of pricing would recommend because it gives valid results and therefore is the best method to base your price optimization on when it comes to groceries.
Price optimization for Business-to-Business products
The volume of transaction in the business-to-business industry does not normally reach a level where it gives enough data to use sales modeling. On the contrary, the conjoint analysis method is often applicable. Historically the choice-based conjoint analysis has faced some limitations when it came to complex business-to-business products. Instead a more advanced analysis method in the form of adaptive choice-based conjoint analysis has proven to be better suited, and it gives you several answers to your price optimization, not only concerning the core product but features of it as well.
In addition to the abovementioned top line price optimization it is also possible to optimize prices in other ways in the business-to-business industry. Unless the company has already made a huge effort to optimize its discounts, it is often possible to improve the current average prices with 1 %. Likewise, all the cost-to-serve elements, also known as all the services that the company gives the customers for free, or nearly, often hold great potential of improving the average prices even further with normally ½ %, which is also worth acknowledging. When discussing price optimization the starting point is often the current pricing, but it can make great sense to analyze alternative models of pricing which may capitalize the customers’ perceived value of your product even better and potentially give access to new segments of customers.
Find the right price with price optimization
It is worth noting that price optimization does not necessarily leads to higher prices even though it may be the intention and the end result because companies tend to set their prices too low in the beginning. Lower prices can also prove to be the most optimal way if the volume rises accordingly. The analyses mentioned above will give the right answer, whether it is a lower or higher price.
To sum up, price optimization holds great potential to improve your company’s earnings, if you are not already working systematically with pricing. In addition, the financial effort in covering the potential of optimization and subsequently implementing the results are often exceeded by the outcome within a few months.