Regardless of the industry your company is a part of, pricing decisions can make or break your company’s bottom line. Many companies struggle to find the optimal pricing strategy to balance profit margins and customer demand. Without the right tools, such as price optimization software, businesses risk leaving money on the table or losing customers to competitors with more competitive pricing strategies. Price optimization software can help your business create personalized pricing strategies that cater to each customer’s unique needs and leverage value-based pricing for your organization’s unparalleled value points. However, before you start using price optimization software, your company will need to get a range of factors organized. By following these steps outlined in the article below, businesses can look to create a successful pricing strategy based on price optimization that increases sales, improves customer retention, and maintains profitability.
At Pricefx, we are a leading pricing software vendor with more than 12 years of experience in the industry, helping many businesses condemn their laborious and error-prone attempts at price optimization with Excel to extinction. Facilitating automated price optimization software instead, we supply our customers with an award-winning suite of 360-degree pricing solutions.
In this article, we explain exactly what price optimization is and why it is important before we examine the top 7 ways to prepare and get your ducks in a row before implementing a price optimization software solution.
What is Price Optimization Software & Why is it Important?
Price optimization is the process of finding the optimal price point for a product or service that maximizes profitability while also achieving business goals. It involves analyzing internal and external factors, such as production costs, competitor pricing, and customer demand, to identify the optimal pricing strategy.
Implementing a price optimization strategy using software designed specifically for the purpose can be critical for a business’s success, as it allows them to stay competitive and profitable in their industry.
However, it is important to note that price optimization isn’t just about profitability.
By fine-tuning pricing strategies, businesses can achieve a range of business goals, such as increasing margins, volumes, or revenue.
For example, a business may choose to implement a volume-based pricing strategy to increase market share or a premium pricing strategy to differentiate their products from competitors if they are introducing new products to the marketplace, rather than aiming for pure profit.
Whatever your business objective, price optimization software allows businesses to make informed decisions and stay agile in response to changes in the market, customer behavior, and internal factors.
The Top 7 Things to Organize Before You Start Using Price Optimization Software
Before you dive headfirst into using the power of price optimization software, straight out of the gates it is important to organize a few things to ensure that you get the most out of it.
1. Historical Data
One of the first things you need to organize is your historical data. This includes information about your last 12 months of sales, revenue, and profits compared to how you are currently performing. This data will serve as the foundation for your pricing strategy and will be used to create algorithms that predict future sales and revenue.
When organizing your historical data, you should pay close attention to the trends and patterns that emerge. This will help you identify any areas where you can improve your pricing strategy.
For example, imagine you are a manufacturer that makes and sells air conditioners. Naturally, you notice that your sales of non-reverse cycle units (that only cool) peak in the spring and summer, while your reverse cycle systems that heat as well as cool have strong sales throughout the year. By analyzing this data through the prism of your future price optimization software package, you can adjust your prices accordingly to maximize profits, or whatever other business outcome that your organization might be seeking.
2. Competitor Data
Another thing you need to organize is your competitor data. This includes information about your competitors’ pricing strategies, product offerings, and marketing tactics. By analyzing this data, you can identify any areas where you can differentiate yourself from your competitors and gain a competitive advantage.
For example, let’s say you are a grocery store that sells organic produce. You notice that your competitor, a larger supermarket chain, has started offering a wider selection of organic produce at lower prices. By analyzing this data, you can adjust your pricing strategy and use the software to optimize your prices to remain competitive and maintain your market share.
3. Customer Data
The third thing you will need to organize is your customer data. This includes information about your customers’ demographics, buying habits, and preferences. By analyzing this data, you can create personalized pricing strategies that cater to each customer’s unique needs.
For example, imagine you are a retailer that sells sporting goods. By analyzing your customer data, you may notice that certain customers prefer specific brands or types of equipment. You can use this information in concert with your upcoming price optimization software solution to create personalized pricing strategies that offer discounts or promotions on the specific products that certain customer segments may prefer.
4. Define Your Pricing (Business) Objectives
As we alluded to earlier, you can optimize your prices to align with whatever business objectives you wish. Before you start using price optimization software, you need to define whatever you want out of your pricing objectives. What are your goals for pricing optimization? Are you looking to increase profits, improve customer retention, or gain market share?
For example, imagine you are a manufacturer that wants to increase sales. Your pricing objective may be to offer promotions on the items that are not selling well due to the current strangled economy. By offering these items at a discounted price, you may be able to increase sales and attract new customers when times are tough or on the other hand engender trust and commitment from your B2B clients to return to purchasing their full complement of products when times get better.
However, if your manufacturing business has low warehousing costs, you might want to avoid discounting and keep your products on the shelf until the economy improves.
5. Define Your Pricing Constraints
Pricing constraints are another critical component of price optimization. These are the limitations that businesses face when creating pricing strategies. Constraints can include factors such as production costs, profit margins, and customer expectations.
For example, let’s say you are a manufacturer that produces luxury watches. Your pricing constraint may be to maintain a certain profit margin on each watch. By analyzing production costs and competitor pricing data, you can use the software to optimize your prices to maintain your profit margin while also remaining competitive with other manufacturers in your field.
6. Know Want you Want to Achieve – Determine Your Pricing Strategy
Once you have organized your historical sales data, competitor pricing data, and customer data, and defined your pricing objectives and constraints, it’s time to determine your pricing strategy. This is where you use price optimization software to create a personalized pricing strategy that caters to each customer’s unique needs.
Define your scope and decide if you are going to optimize prices for your entire product portfolio or just a subset.
For all customers or just some customer segments.
For all markets or only a selected few.
As we discussed above, your goal for the optimization could be anything from maximizing margins, volume, or revenue, to minimizing cost to serve, so you need to know precisely what it is you are trying to do with the optimization.
7. Adopt a ‘Test & Refine’ Price Optimization Mindset – It’s Not a Set & Forget
Finally, before you have your price optimization software implemented and ready to power your company’s pricing, it is time to check that across the organization that you have the right mindset in order.
Testing, refining, and monitoring your pricing strategy through price optimization will never end and adapting ‘on the fly’ as necessary will be a commonplace event.
Price optimization is an ongoing process that requires constant monitoring and adjustment.
Fortunately, price optimization software is easily adaptable to reflect the continual reorientations that are frequently necessary for the best business results.
It is Time to Get Started with Your Price Optimization Solution
Now you know how to get organized in advance of using price optimization software to power your organization set of business objectives, it’s time to get started on selecting the best solution to suit your company’s needs.
In the table below, you can directly compare 6 of the best price optimization software tools on the market today (outside of our own award-winning Pricefx optimization solution, Optian) and how they stand up to scrutiny.
To dive deeper into reviews of the 6 price optimization software vendors above(and how they directly size up toPricefx), check out the handy article below:
Customer Solutions Director & Account Executive ,
Adam Pomothy is Customer Solutions Director and Account Executive for Pricefx APAC. He began his journey with Pricefx 8 years ago in Europe and later moved to Brisbane, Australia to develop the regional Pricefx headquarters and Center of Excellence for APAC. While his background is technical (Software Engineer), most of all he enjoys working with and adding value to his customers, his team and other Pricefx colleagues. When he needs to relax, he goes to the gym or spends time with his family, ideally in nature.