February 23, 2023
Pricing is an integral part of your business. It’s what separates a healthy profit margin from a struggling business. However, many businesses struggle to optimize their pricing so that they can achieve their organizational goals.
The trouble with pricing is that it’s always changing. Disruptions in the economy, changes to your market, or even shifts in your target audience can all require you to update your pricing so you remain competitive and profitable. The process of changing prices is called pricing optimization, and it’s one of the most powerful tools in your company’s arsenal.
In this guide, we’ll walk you through different factors to consider when deciding your pricing, the five steps of the pricing optimization process, and indicators that it’s time to re-evaluate your current pricing.
What Is Pricing Optimization?
Pricing optimization uses machine learning, artificial intelligence, and predictive analytics to determine at what price your products should be offered to meet your customer needs while achieving your desired profit margins. Utilizing technology in this process allows you to measure price elasticity and the effects various pricing strategies are likely to have on your top and bottom line, with minimal risk.
Your business is constantly accruing data about its customers, sales, and products. Using data-driven algorithms not only gives you a better view of your business but of your industry overall. It helps you position your company to be more competitive and easily keep up with a quickly changing landscape. This keeps you on track to reach your long-term strategic goal and ultimately grow your business.
Factors to Consider
There are a lot of factors to consider when trying to find your optimal price point. Among all of the data points you accrue, however, a few stand out as the most important to measure.
- Customer behavior – What products are your customers purchasing? How much do they purchase? How often are they purchased? Have they stopped buying certain products? Aligning your customer preferences with the products you offer as well as the services provided in conjunction with these products is key to optimizing your pricing and achieving your profit margin goals.
- Geographical market details – Is your product or service location-specific? Does it cost more to provide a product in a specific market? Are your competitors offering a different price in that location?
- Historic sales data – What products/services are sold to specific customers at what price over the past 1-2 years? The more detailed the transactional sales data, the better.
- Overhead costs – What is the acquisition cost of your products? What does it cost to provide the services associated with your sales? What is the minimal gross profit margin needed to be profitable?
- Inventory – Which products are sold from your warehouse inventory or which do you dropship from your suppliers? Do you have products that aren't selling that are taking up warehouse space? Do you have an inventory advantage over your competition?
- Competitor pricing – What are your competitors charging for similar or the same products? How often do you check your competitor prices? Do you check to see if your competitor products are in-stock? Keep in mind that your competitor’s prices don't set a ceiling for your prices; it just gives you an idea of how other companies value their products and if customers are willing to pay that price.
- Demand fluctuations – Are you in a seasonal industry? If so, you need to ensure your pricing strategy accommodates slow seasons and isn’t geared solely toward your busiest months.
Combined, all of these factors will paint a clear picture of your business and market landscape, as well as what your pricing strategy needs to accomplish to protect your profits.
How to Optimize Pricing
Once you’ve gathered all the data you need, you can start the pricing optimization process. There are five basic steps every business should follow:
- Solidify your strategy
- Gather customer insights
- Organize and analyze data
- Measure Value in Real Time
- Choose price optimization software
Solidify Your Strategy
Before you start looking at different pricing strategies, you need to be clear on your business’s strategic vision. Where do you want your company to go and what do you hope to achieve?
Take some time to clearly outline your business strategy and make notes of how your revenue and profits will support your goals. For example, you might strive for a 20% profit margin so you can reinvest 10% of it in your business growth. Whatever your numbers are, they will help you make smart pricing decisions by giving you an end-goal to focus on.
Part of outlining your strategy is identifying KPIs you can track to measure progress. These metrics should be meaningful indicators of your success and relate directly back to your goals. A few potential KPIs include:
- Number of units sold by product, customer, and market
- Revenue per customer, product, and market
- Gross profit per product, customer, and market
- Number of new customers
- Churn rate
Gather Customer Insights
You have to know your audience to successfully price your products. You should have a solid understanding of your customers’ needs and budget to create competitive pricing. Gather information about what each of your customer segments look like, including:
- Demographic information
- Buying behaviors - including product preferences, purchasing frequency, purchasing volume, etc.
- How they respond to changing market conditions
Setting prices becomes much easier when you understand how your customers interact with not only your brand, but your industry as a whole. You need to know what they’re looking for, how they find companies to work with, and how much they’re typically willing to spend to solve their problem.
Organize and Analyze Data
Your business accumulates a lot of data, but having it all stored out of sight, gathering dust, won’t help you. You need to organize your business and pricing data into meaningful reports so you can analyze past performance and forecast future expectations. Both of these activities help you make more informed business decisions about immediate and long-term actions.
In this step, it’s helpful to utilize automation that can aggregate, parse, sort, and organize your data so it’s easier for your team to analyze. One way to do this is with robotic process automation (RPA), which can automate data entry, management, and even some data analysis. It saves you time and energy so you focus on what your data is telling you.
Measure Value in Real Time
Historical data is incredibly valuable when it comes to tracking progress and predictive analytics, but it doesn’t tell you much about the here and now. Because price changes are inevitable in any business, you need to ensure you have the best price for your current market conditions.
You need to measure the value of your product in real-time. Look at those KPIs you set and determine if enough people are buying your product at its current price point. Do you need more dynamic pricing for different customer segments? Could you raise the price and keep your customers?
Keeping tabs on how your price optimization strategy is performing in real time, and being agile enough to adjust when necessary, helps you gain an edge over your competitors by pricing based on current circumstances and addressing immediate consumer demand.
Choose Price Optimization Software
All of these steps can be incredibly time consuming for your team to accomplish manually and often require a significant understanding of data science. That’s why many companies opt to use price optimization tools instead.
At EnterBridge, we built Point2Profit™ to help clients optimize pricing. It uses key pricing data to compute the right price for the right customer under the right circumstances. The Point2Profit™ pricing machine-driven algorithms incorporate the factors previously mentioned to help identify a customers willingness to pay when setting the optimal price.
After you’ve gone through all the steps of the pricing process, it’s time to refer to those KPIs again. Regularly evaluating the changes in these metrics allow you to measure pricing success and know when it’s time to make adjustments.
When to Optimize Pricing
Optimizing pricing is not a one-time event. Prices should be refreshed regularly - customer needs change regularly, product costs increase and decrease, and market conditions are constantly changing.
Optimizing pricing should be an ongoing process in any successful business. Whether you’re diving into new markets, launching a new product, or just reassessing your market share, your pricing should always be poised to support your long-term goals.
That being said, there are a few reliable indicators that it’s time to reevaluate your pricing:
- Changes in product/service costs
- Major changes in your business goals/needs
- Major changes in your customer’s business or behavior
- Economic downturn
Each of these items can affect both the customer life cycle and the cost of doing business. If your business is facing any of these situations, it’s time to consider price optimization solutions.
Is It Time to Optimize Your Pricing?
If you haven't optimized your pricing in the last 3 months, it's time to reevaluate. At EnterBridge we help Fortune 1000 companies in a wide range of industries including wholesale distributors, retailers, and manufacturers implement better price management and optimization. We can help you evaluate your current pricing strategy and make data-driven recommendations on how to optimize your prices.
Book a call with us today to get started!