How to Price in Alignment with Key Business Objectives Using Market Simulation
May 12th, 2021 | 5 min. read
Pricing in Alignment with Key Business Objectives Using Market Simulation
Traditional price optimization helps you maximize profit on your products based on price elasticity derived from historical sales transactions. The problem is that it calculates the optimum price for individual products without considering the wider impacts of a price change.
Let’s say that your traditional price optimization software recommends a change of price to product A, showing a potential uplift of 10%, and another on product B, showing an uplift of 15%. It’s fair to assume, therefore, that if you applied the suggested changes to both products, you’d see a combined increase in profit of 25%.
Alas, the fact is that applying price changes to two products at the same time could actually result in no change or even a decline in profitability! This is because the predicted lift in product A was calculated at the expense of product B, and vice versa.
This is cannibalization and it is the biggest hidden pricing challenge companies face today.
Most solutions offering price optimization capabilities use price elasticity to optimize prices, meaning they can only maximize profit from a single product point of view (each product price is optimized in an isolated way). What’s more, they require lots of transactional data, and are only valid for a single use. They aren’t able to handle simultaneous price changes, forecast cannibalization or predict the impact of a price change across your entire product category, let alone anticipate competitor and market response!
This is where Pricefx’s Market Simulation comes in.
The Next Step in Price Optimization
New to Pricefx’s Bijou offering, Market Simulation leverages our Next Gen AI-based technology to become the next step in price optimization evolution.
Rather than concentrating only on product transactions, Market Simulation focuses on customer behavior – looking at pricing from the customer perspective and predicting real customer purchase behavior response to a change. It provides end-to-end impact simulations by reproducing the dynamics of the market in order to help you optimize prices while taking the far-reaching business implications of a price change into consideration – like how it will impact other products in your portfolio, how the market will respond and how the customer will react.
In addition to providing “what if” scenarios to help determine predicted market response to your own price changes, simulating best-average-worst case scenarios of possible competitive response outcomes, it also calculates your best response to a competitor’s price change.
Using Market Simulation to Align Pricing with Business Goals
Let’s say the hypothetical soda drinks company FizzPop wants to rebalance the pricing of their product portfolio. They take a two-pronged approach. The first with a focus on the simple profit optimization, the second focused on more extensive part of product portfolio and also its competition.
- Optimize prices of its two best-selling drinks (FizzPop and FizzPopLux)
- Optimize its portfolio as compared to its rival (BubbleUp)
1. Optimize prices of FizzPop and FizzPopLux
Here, Fizzpop’s key objective is to maximize profit.
Just by rebalancing the prices of these two products, the company achieved a $40k uplift of its profits while the overall volume of sold products did not change.
2.Optimize Prices in Relation to BubbleUp
Here, FizzPop’s key objectives are to:
- Increase profit
- Keep existing customers
- Keep average price level
- Avoid a price war
Using Market Simulation to increase profit while ensuring alignment with other key objectives, FizzPop calculates appropriate price changes to its entire portfolio:
Results of Market Simulation price optimization for FizzPop:
- Profit increase of 6.7%
- Market Share unchanged (+0.1%)
- Revenue increase of 8.3%
Impact on BubbleUp:
- Profit unchanged (0.4%)
- Market Share unchanged (-0.1%)
- Revenue unchanged (-0.4%)
FizzPop has managed to increase profits and revenue without inciting a competitive reaction from its rival. It has succeeded in optimizing prices while keeping its key business objectives in sharp focus (increase profit, keep existing customers, keep average price level, avoid a price war).
This is the difference between price optimization and Market Simulation.
Market Simulation: The Game Changer in Price Optimization
Market Simulation enables price optimization in the context of the overall product portfolio as well as competitors and their possible response, elevating pricing from the tactical to the strategic.
With Market Simulation, you can identify a wide range of profit, revenue and volume optimizing prices – for single product, multi-product and portfolio pricing. And you’re able to calculate customer willingness to pay, value created by products and profit at risk from competitors while keeping your many objectives in sharp focus.
In short, with Market Simulation, you can truly understand the actual impact a price change (or many) will have on your business.
So, if you’re looking to gain a superior competitive edge, you simply can’t do without it.
Would you like to learn more? Join Toby Davidsson, our Chief Product Officer, and Milan Haba, Product Guru, on May 25th!