Is Pricing Analytics Software Right for Me?
March 15th, 2022 (Updated 03/10/2023) | 13 min. read
Although big data and analytics have become routine phrases across many modern businesses, a lot of companies still fail when it comes to identifying practical pricing uses for the plethora of data that they possess. Imagine you have all the sales and transactional, product and customer data you could ever wish for stored in your CRM, ERP, Qlik, Power BI, Tableau or Excel spreadsheets. Sure, it’s nice to have all that data but if you’re not using it to inform the smartest and most profitable pricing your products, then you’re simply guessing what your optimal prices are. Most concerning might even be that you’re performing no kind of data analytics at all regardless of the format.
Whichever pricing system you’re currently using, to get the most out of the data you already have, augmenting it and powering up that data with smart technology will be key to your organization’s future profitability. Effectively leveraging the data that already exists in your business can help you quickly identify potential areas to adjust pricing strategies and capture profit opportunities. Without uncovering and acting upon the opportunities (if you stay with your legacy pricing system), if you’re a large enterprise company, you could be leaving millions of dollars of profit on the table every quarter. This is where the role of pricing analytics comes into the picture and why you may be asking the question; Is Pricing Analytics Software right for me and my business?
At Pricefx over the last decade, we have assisted companies across all ranges of industries to dramatically improve profitability and market share by defining optimal prices and pricing strategies with pricing analytics software. The software leverages data to understand what drives their customers’ buying decisions and integrates this knowledge to meet the company’s pricing needs and business objectives.
To get us started, let’s dig down into what pricing analytics software is and what it does before we move on to discussing its benefits and drill down to who it is right for, who may not need it at all and why.
What Is Pricing Analytics Software and How Does it Work?
As we mention above, pricing analytics is all about using the data you have in order to make informed pricing decisions on the road to better profitability for your company. But how does the software do that exactly?
Pricing analytics is analyzing the way we look at data, but pricing analytics software will specifically consider two foundational key metrics on route to increasing profitability for your company – the pricing waterfall and the margin bridge (also known as margin breakdown).
The Price Waterfall Explained
The price waterfall is a simple, easily understood visualization tool that offers incredible pricing insight. You can plainly see in the waterfall graphic below how distinct factors influence your price and display visually the cumulative effect of all discounts and rebates on your company’s profitability.
Generally, the price waterfall chart starts with list price, but it can start with any base price that discounts and rebates/incentives are applied to. (Discounts are price variations applied before the invoice price. Rebates and Incentive Programs are price variances that are applied after the invoice price.)
The price waterfall shows the discounts to get from list price to invoice price and then any further rebates to get to pocket price. Variable costs can also be added to the end of the price waterfall to show visually just how much pocket profit is left over after all your organization’s discounts and rebates have been factored in.
Margin Bridge (or Margin Breakdown) Explained
The margin bridge on the other hand, (also referred to as a margin breakdown or even a Price Volume Mix Analysis) is a report which shows the gap between your budgeted and actual sales and provides an explanation. There are three main types of effects or components that should be considered to explain the gap:
- Price effect – A deviation due to the application of higher or lower selling prices.
- Volume effect – A variation in turnover due to the total units sold.
- Mix effect – Measures the impact on the sales amount resulting from a change in the mix of the quantities sold.
The graph below (an actual pricing analytics software screen shot) shows an example of how a business margin was impacted from one quarter to another. In the example below, despite an increase in cost, the margin was still higher in Q3 than in Q2 thanks to the positive price adjustments and increase of volume.
These two metrics of the price waterfall and the margin breakdown are the things that will drive your company’s profit and the foundational factors of pricing analytics software, but you will also require a certain level of understanding of your business and your desired outcomes. That being the case, each company will have its own unique pricing analytics fingerprint for the software. It is not something that you would look to leverage manually with an ‘out of the box’ business intelligence tool. You will require pricing analytics software to drill the numbers down to discover the profit points for your business.
The 3 Different Levels of Analytics and Leading to AI
Once you decide to switch over to pricing analytics software, the huge volumes of data help improve decision-making across more levels than you may have imagined.
The levels of analytics options can be categorized into three distinct levels. No one type of analytic is better than another. In fact, they co-exist with, and complement, each other in a symbiotic relationship for your business to have a holistic view of the market you operate in, and how you can compete efficiently on price within that market includes using:
- Descriptive Analytics – to provide insight into the past and answer: “What has happened?”
- Predictive Analytics – Using statistical models and forecasting techniques to understand the future and answer: “What could happen?”
- Prescriptive Analytics – Which apply price optimization and simulation algorithms to advise on outcomes and answer: “What should we do?”
Prescriptive Analytics is where Artificial Intelligence (AI) enters the pricing analytics software equation. That can come in several diverse ways that can include assisting you to better segment customers and products, helping you to put together better quotes and/or offers or prices that are more appealing to your customers.
Taking that even one step further, AI can help you to optimize your operations and your products to better reflect and predict what your customers want and are willing to pay.
How Can I Use Pricing Analytics Software in MY Business? – A Use Case Example
Imagine yourself as Pricing Manager of a large electronics retailer selling your products both online and, in your bricks-and-mortar stores to a diverse set of customers spread across different regions and even in different regions of the globe.
So, due to the dispersed nature of your customer base, you are presented a significant challenge when it comes to effective pricing: how can you ensure the optimal price is being exported to the correct location and at the right time?
Of course, you will require a data-driven pricing solution to streamline and stabilize prices centrally while responding flexibly to the needs of customers at a regional level. You will need a tool that will match both your online and offline prices and be competitive with the prices of your business rivals.
That’s where pricing analytics software comes in.
Of course, those jobs could be managed manually, but who has that amount of time to take such labor-intensive and error-prone manual tasks? In a rapidly changing world where prices can fluctuate wildly due to reasons such as pandemics, conflicts, supply chain disruptions, or rising distribution costs, they can affect your prices dramatically.
You need to recognize the cost levers quickly before they eat into your profit margins. Trying to do that manually becomes no longer feasible.
To remain competitive in that kind of modern business environment, your electronics retail store will need a way to monitor the prices of your rivals. With pricing analytics software, you can monitor and decide to match the prices, undercut them, or initiate any number of strategies that would give you the best chance of achieving a sale with the highest margin.
As pricing analytics software can increase a greater number of analyzed prices over time, the more intelligent the pricing technology solution becomes, and the better your electronics retail business can meet the needs of its customers and be more profitable along the way. You’ll be empowered to match your own online and offline prices too, all the while getting a better picture of your customer’s buying habits, and gain insight into how different customer groups behave when deciding to buy your electronics.
The 3 Main Benefits of Pricing Analytics Software
1. A Sole, Automated and Accurate Source of Truth for Price and Profitability
The major benefit you can derive with the use of pricing analytics software is that it can become your organization’s sole source of scalable pricing truth and do so objectively, unearthing your company’s pathway to increased profitability without any bias or error.
Working with pricing analytics software and its targeted pricing outcomes draws an inevitable and direct comparison with older forms of pricing technology.
Working with any software or business intelligence tool like Excel, Tableau or AS/400, it’s up to the individual person setting up your company’s pricing to calculate correctly, across different departments and theoretically across regions. That will be almost impossible.
It’s too expensive, error-prone, and time-consuming to analyze thousands of products manually. Automated pricing analytics software can identify what drives value for each of your products, and match that with historical transactional data. This can allow your business to set prices for clusters of products and customer segments based on data. The automation will allow you to replicate and tweak analyses so it will be unnecessary to start from scratch each time.
2. Developing Price Optimization & Earning Greater Revenues
Price analytics software provides data and analysis to adjust the prices of your products. This price adjustment will maximize the profits of your business. Price optimization across your entire product line will be a key profit increase driver.
What’s more, using price analytics software can also fix price misalignments or price leakages in order to increase the profits of your business.
3. Planning for Price Changes
Companies with a pricing strategy already in place have unique needs, typically revolving around the necessity to closely monitor the market and to anticipate the impact of a price change or a promotional campaign. Those companies usually require predictive models provided by pricing analytics software.
Predictive models can predict the future based on past data, examine the present and plan for the price changes in the future with great accuracy.
Businesses can learn a lot about what to do and even more, about what NOT to do. Ultimately, pricing analytics software can potentially save large enterprise companies millions by putting an end to ineffective or inefficient discounts and promotions.
Who Is Pricing Analytics Software Right For?
Pricing analytics software facilitates companies in getting the best price for their products and increasing the profits for the business. So, that is going to be just about every business, right? Perhaps it is easier to define who it is NOT for (see below).
Having said that, businesses best suited to pricing analytics software will be those companies that are seeking to;
- Dramatically improve profitability and market share by defining optimal prices and pricing strategies.
- Uncover “quick wins,” or extra revenue and margin that can be generated by quickly fixing the most obvious cases of price misalignment or leakages.
- Improve operational efficiency, and; Get stakeholders aligned with their pricing strategy.
Who Is Pricing Analytics Software NOT Right For?
Smaller companies without experienced IT or pricing teams may need to really consider if pricing analytics software is something they can give the administrative attention it deserves. Pricing analytics software can be complex to implement and administer, and perhaps that is exactly why many companies are not yet using it in their daily course of business. When implemented correctly, pricing analytics software can have a substantial impact on how businesses make decisions, and on the company’s bottom line.
However, having the resources available to dedicate to the successful implementation of pricing analytics software will be key. Learn more about working with a partner to assist in the integration of pricing analytics software in article above.
How Does the Pricefx Pricing Analytics Software Model Differ?
At Pricefx, the pricing analytics software is part of the Plan package. It is unique as you can choose which package/s that your company needs, and your own customized configurability of the data model.
To explain that in more detail, that means that users of Pricefx software are encouraged to ‘own’ their pricing analytics software system. Users can implement the pricing software to according to their company’s own unique set of business objectives and required outcomes.
For example, maybe you only require analytics and optimization? Or do you want to combine those options with quoting and channel management functionality from the Profit package? It is up to you and what fits your business requirements.
Check out more details of the Pricefx – Plan, Price, Profit packages here (with added advice on where you can begin).
At Pricefx, the pricing analytics software offers in-built flexibility due to its system architecture being uniquely designed ‘from the customer’s needs up,’ rather than prescriptively from ‘the pricing analytics software vendor down.’
It is your company’s very own data that drives the system, and with that being the case, your company sets the agenda into what you want to achieve through the software’s application.
In short, you can be your own pricing boss and not be at the whim of an outsourced pricing scientist.
That’s Great – But What Do I Need to Plan to Buy Pricing Analytics Software?
Now you know what pricing analytics software is, what it does, its benefits, who it is for, and who it’s not for and how it works here at Pricefx.
The chances are that you already know if your organization will be able to benefit from pricing analytics technology or not. However, you might have correctly identified that the buying process is not as simple as purchasing Microsoft Office or Adobe Acrobat and uploading it to your laptop.
At Pricefx, we have helped hundreds of clients tick off all the boxes in getting their pricing software project purchased, off the ground and implemented.
That’s exactly why we prepared this article below for compiling a checklist for pricing software and checking them off as you go: