For many businesses, finding the optimal price for their products can be a significant challenge. Setting a price that is too high can deter customers, while setting a price that is too low can result in lost revenue and decreased profitability. What’s more, with a mixed quality product range, defining prices can be daunting. Take for example an electronics or smartphone retailer that offers unique, high-quality items, in addition to discount and generic models. The store owner may struggle with determining the right price points for the diverse range of products on offer which may which each may appeal to a different customer segment. This can be a daunting task, but with the right approach and tools, it is possible to find the optimal price that will drive sales and maximize profitability. In this article, we will discuss the two main methods for determining the optimal price for your products: Microsoft Excel and pricing software. By using these methods and adopting a research approach, you can ensure that your pricing strategy is based on data and analysis, rather than guesswork and assumptions.
At Pricefx, we have spent more than a decade in the business of providing price optimization software to enterprise-level businesses like yours as a part of a total pricing software solution. We have a significant level of expertise in defining optimal prices, where that fits into pricing science in general, and how different companies employ distinct approaches. As such, we are perfectly placed to help your organization become more efficient and profitable in your pricing by whatever method you choose.
Let’s start by defining what an optimal price may mean for different businesses and how you define that with a research methodology, regardless if you use Microsoft Excel or pricing software. We will also examine how to find your optimal prices with both Excel and pricing software and look at the pros and cons of each method.
Optimal Prices Are Different for Different Business
Depending on your company’s pricing science resources, your version of optimal pricing may be different from that of a company with larger resources. With less resources (your business might only have the resources or need to simply find your best prices with Excel), your company may not have access to the same data, technology, and expertise that a larger company may have, which can affect your ability to identify and implement optimal pricing strategies. This may mean that your company’s optimal price may not be the same as a larger company’s optimal price, as their resources may allow them to fine-tune their pricing to a greater extent.
However, having less resources does not necessarily mean that your company cannot implement effective pricing strategies, although the absolute best price optimization might be beyond you without an automated pricing software solution.
However, having fewer resources can sometimes lead to more creative and innovative approaches to pricing. For example, your company may focus on building strong relationships with customers, offering personalized pricing plans, or experimenting with new pricing models that larger companies may not have the agility to try. Ultimately, your company’s optimal pricing strategy should be based on a combination of your available resources, market research, and a deep understanding of your target customers and their willingness to pay.
The Importance of Researching Optimal Prices with Excel or Pricing Software
Regardless of whether a company uses Microsoft Excel or pricing software, research is crucial in finding optimal prices. To determine the best price for a product or service, a company needs to understand the market demand and the competitive landscape. This requires gathering and analyzing data on customer preferences, pricing trends, and competitor behavior. By conducting research, a company can gain a better understanding of their customers’ willingness to pay and adjust their prices accordingly. This can lead to increased sales and profitability, as well as a competitive advantage in the market.
In addition, research can help a company identify new opportunities for pricing innovation. By exploring new pricing models, a company can potentially tap into new customer segments and increase revenue streams. For example, a company may consider offering subscription-based pricing models or dynamic pricing, which can be optimized based on real-time market demand. Research can help a company identify the most effective pricing models for their specific product or service and ensure that they are pricing their products in a way that maximizes profitability and customer satisfaction.
Finding Your Optimal Price With: The Microsoft Excel Method
Microsoft Excel is a powerful tool that can be used to determine the optimal price for your products. It allows you to perform complex calculations and analysis, including pricing simulations and sensitivity analysis. Here are the steps to follow:
Collect data: Gather as much clean data as you can on your sales transactions, customers, and products.
Create a pricing model: Use Excel to create a pricing model that can consider your costs, sales volume, and profit margin. You can use different scenarios to simulate the impact of different pricing strategies on your profitability.
Conduct sensitivity analysis: Use Excel to perform sensitivity analysis to identify the impact of different variables on your pricing strategy. This can include changes in your costs, sales volume, and profit margin.
Determine the optimal price: Use the pricing model and sensitivity analysis to determine the optimal price for your product. This should be a price that maximizes your profit margin and considers the impact of different variables on your pricing strategy.
The Pros of the Microsoft Excel Method of Optimal Pricing
Using Microsoft Excel to find your optimal price can be a quick and uncomplicated way to calculate your pricing strategy. However, it also has its advantages and disadvantages. Keeping it positive to begin with, let’s dive into the pros of using the Microsoft Excel method of finding your optimal price:
Cost & Ease of use: Microsoft Excel is a widely used software that is user-friendly and easy to learn, which makes it accessible to most businesses.
Customizable: You can create customized formulas, charts, and graphs to visualize the pricing data and analyze it in many ways.
Quick calculations: Once you have input your data into Excel, you can quickly calculate your optimal price by using built-in formulas, which can save you time.
The Cons of the Microsoft Excel Method of Optimal Pricing
Microsoft Excel is not the best tool for optimal pricing as it can become cumbersome if the pricing models are complex. It does not have the capacity to handle substantial amounts of data, making it difficult to analyze and visualize data. Additionally, it lacks features that more advanced software has such as built-in optimization and decision tree analysis modules, which are crucial for accurate pricing.
What’s more, Excel does not have an intuitive user interface, making it difficult for non-technical users to work with it without extensive training. Other drawbacks include:
Limited accuracy: The Microsoft Excel method of finding your optimal price relies heavily on the accuracy and completeness of the data input into the software. If the data is not accurate, it can result in flawed calculations.
Limited analysis: While Excel can perform simple analysis and calculations, it may not be able to analyze complex data or provide insights into market trends or customer behavior.
Limited scalability: As your business grows and becomes more complex, Excel may not be able to handle the increased volume of data and calculations required for pricing. To find your optimal prices in a large-scale global business with hundreds of thousands of SKUs, you would require thousands of Excel database managers working around the clock, 24/7/365.
Overall, the Microsoft Excel method of finding your optimal price can be useful for small businesses with simple pricing strategies, as it is easy to use and customize. However, it may not be as accurate, insightful, or scalable as other pricing methods for large or enterprise-level businesses with more complex pricing strategies.
Finding Your Optimal Price With: The Price Optimization Software Method
Pricing software is an increasingly popular tool used by businesses to determine the optimal price for their products. It uses complex algorithms, artificial intelligence (AI) and machine learning (ML) to analyze data and provide recommendations for pricing effectively and in total alignment with your organization’s overarching set of unique business objectives. Here are the steps to follow:
Collect data: Provide the pricing software with the cleanest data set possible about your costs, sales history, products, and customers.
Analyze the data: The pricing software will analyze the data using complex algorithms and a combination of AI and ML to provide pricing recommendations.
Determine the optimal price: Your business goals (profit margin, revenue, value, market competitiveness, etc. as you see fit) should form your primary user story for determining the optimal prices with your pricing software solution.
The huge advantage of using pricing software to define your optimal prices is that it uses sophisticated algorithms and AI and ML to analyze data, which can provide more accurate pricing recommendations. It also saves time and can provide real-time pricing updates based on changes in the market, not to mention simulate your price list changes and anticipate the results of the changes in your profitability. It’s worthwhile to consider that many pricing software variants supply a range of tools (rebate and channel management, analytics and competition data, sales compensation, price setting and updates, a CPQ (Configure Price Quote) solution etc.) in their technology suite in addition to a price optimization tool.
The Pros of the Pricing Software Method of Optimal Pricing
Price optimization software is a powerful tool that can analyze copious amounts of data and provide businesses with insights into the most effective pricing strategies for their products and services. Here are some more of the pros of using pricing software to define your optimal prices:
Increased accuracy: Price optimization software can analyze vast amounts of data, including information about customer behavior, sales history, and market trends, to provide a more accurate optimal price for your product or service.
Real-time benefits: Working in real-time with price optimization software allows businesses to make decisions based on the latest market data and trends. This increases the accuracy of decisions, potentially leading to better revenue results. Real-time capabilities also ensure that businesses remain competitive in constantly evolving markets.
Customizable: Many price optimization software systems allow businesses to create custom pricing models that are tailored to their specific products, services, and customer segments, which can provide greater accuracy and better results.
Improved profitability: Price optimization software can help businesses to identify pricing strategies that maximize profitability and increase revenue.
‘Right Time, Right Person, Right Price’- Pricing software provides an automated method to manage the “right time, right person, right price” pricing model. This type of software ensures that pricing can be adapted quickly and accurately according to market conditions. Additionally, pricing software can be configured to provide personalized pricing options to individual customers, ensuring they receive the best value for their purchase.
The Cons of the Pricing Software Method of Optimal Pricing
On the flip side, many businesses consider pricing software to be expensive and as many pricing software variants require a significant upfront investment in terms of time and resources to set up and integrate with your business systems. Other cons can include;
Perceived high cost: Price optimization software can be expensive, particularly for smaller businesses with limited budgets and it’s simply not cost effective for the results generated. Larger businesses usually have the most to gain from a price optimization software solution. See the article directly below about the costs of pricing software.
Complexity: Implementing price optimization software can be complex and may require technical expertise, or having the IT Team free from competing priorities can be a barrier for some businesses.
Limited reliability: While price optimization software can provide powerful insights into optimal pricing strategies, the accuracy of the results may be limited by the quality of the data input into the system. The better your data quality, the better and more insightful the results.
Overall, price optimization software can be an effective tool for businesses that sell products or services in competitive markets with a large volume of clean and reliable data, particularly those with multiple customer segments and products.
Great – How Can I Determine if my Optimal Prices Will Add to My Margins?
Now you know how to research the optimal price for your goods and services regardless of whether it is via Microsoft Excel or pricing software method, and how optimal prices can add to your company’s bottom-line profit and margins.
If you would like to learn more and get a feel for where the award-winning Pricefx pricing software could potentially take your margin numbers, check it out for yourself on our free Margin Lift Calculator:
As a pricing professional, Sara-Marie Gansert has been supporting companies across various industries to improve their margins by finding and realizing the right pricing strategies. Now working as a Solution Strategist for Pricefx she introduces businesses to pricing software tailored to master their individual challenges in pricing. On the weekends you will find her hiking in the Black Forest, exploring the cities of Europe, or enjoying a good book.