What is Price Optimization?
Price optimization is a revenue management tool that leverages data and analytics to set and adjust prices in order to maximize profitability. Price optimization is concerned with the following types of questions: Could I increase my profitability by raising my price? By lowering my price? How should my pricing be updated as inventory changes? As competitive prices change? As demand changes? What is the right relationship between my base price and the total delivered price?
Why Optimize Price?
Simply, to make more money. The fastest and most effective way to increase profits is through better management of pricing. Getting price right is one of the most fundamental and important management functions. The right price can boost profit faster than increasing volume or cutting costs will; the wrong price can shrink it just as quickly. Even if a company makes the right pricing decisions 90% of the time, it’s worthwhile to try for 92% — the positive impact on the bottom line is that significant. Pricing is also typically an area that can be improved the most with the least investment.
Why Choose Competitive Analytics to Optimize Your Pricing?
We have been successfully delivering a healthy ROI (400% – 1200%) to our clients for over fourteen years. Using our DECIPHER™ Price Optimization Platform, our clients have increased profit margins by 10% to 25%. Our success is due to our exceptionally robust and accurate analytical approach, which gives our clients an unparalleled confidence in their pricing decisions. Nevertheless, we never forget that our clients are the experts in their business. You want to input your own metrics and assumptions? No problem; you can change them on the fly with our powerful, interactive “What-If” tool designed to provide you with a customized hands-on approach to setting prices. We develop the customized proprietary models that calculate pricing strategies and scenarios, but give you the power to instantly adjust the metrics to levels you believe are appropriate.
Our singularly robust and accurate analytical approach is predicated on two key aspects of our methodology
Our DECIPHER™ Price Optimization Platform eliminates the risk of erroneous or biased results by applying multiple methodologies, multiple data sets, multiple weights, and multiple models to generate a series of scenarios. This “levels out” the outliers and provides a balanced answer – one that illustrates the most probable outcome. Think of it as taking an average of all the possible outcomes for your business.
Our DECIPHER™ Price Optimization Platform is based on a proprietary “price versus value” approach that analyzes every value dimension and value component attributable to your product or service from a customer’s perspective. This customer-focused pricing methodology realizes that customers only buy if they believe your price aligns with their perceived value of your product or service. The current and primitive method of setting prices is based on a simplified survey of competitive pricing. DECIPHER™ deploys a more analytical and comprehensive approach to price optimization, so we deliver a much more effective and demand-centric approach that maximizes profits for our clients.
Price Vs. Volume
Lets compare the profit implications of a 1% increase in volume and a 1% increase in price. Studies show that a volume increase of 1% yields around a 3% increase in operating profit, assuming no decrease in price. However, a 1% increase in price increases operating profit on average by 8% – 11%, assuming no loss of volume. In other words, price improvements are typically three to four times more effective on profitability than volume increases. And, many companies have achieved even more dramatic results. For example, one consumer durable products company increased operating profits by nearly 30% with only a 2.5% increase in prices. One industrial equipment manufacturer improved operating profits by 35% by carefully managing price levels up a mere 3%. A wide variety of businesses, including those in consumer packaged goods, energy, and banking and financial services, have achieved comparable results.
Price Vs. Cost Cutting
Price optimization is also more effective than cost cutting. A 1% decrease in fixed costs will produce only a 2% improvement to the bottom line compared to 8% – 11% with pricing. A 1% decrease in variable costs will produce a 5% – 8% improvement on the bottom line compared to 8% – 11% with pricing.
Still not sure if you need price optimization?
View Price Optimization Case Studies to learn how your company can benefit from price optimization.
XYZ Corporation Case Study 17
Strategic Investment Decision Support, Product Segmentation, Investment Strategy, Competitive Performance Benchmarking, Redevelopment Analytics, Price Optimization
KB Home Case Study 19
Market and Product Diagnosis, Re-Positioning, & Turnaround, Price Optimization, Sales Analytics, Product Premium Maximization, Competitive Performance Benchmarking, Investor Reporting
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