All businesses desire maximum profits. This means employing a dynamic ERP (enterprise resource planning) to collect, manage, store, and interpret data in real–time and linking it with all major departments. It also means pricing services and goods at the proper level, which entails determining and implementing prices with the help of an accurate pricing engine. Past practices show companies using Excel spreadsheets to figure optimum prices and to notify the sales end of them. Although workable to some degree, spreadsheets are open to errors, corruption, and manipulation. Pricing software offers a powerful, safe, reliable alternative.
The Basics of Pricing Solutions
Pricing software incorporates most of the basics of pricing, enabling companies to analyze, plan for, distribute, implement, and negotiate prices. Using traditional pricing procedures, businesses set prices based on production, labor, and advertising, and then added a percentage so the company could make a profit. This is called the “Cost-Plus” method. To optimize prices, to succeed in the global marketplace, and to outwit highly-competitive rivals, companies can use pricing software that helps make setting prices simpler and more precise, and allows them to take advantage of cutting-edge pricing rules.
Pricing Policies and You
To achieve its financial goals, your business will want to be aware of the reality of the marketplace and to support your products’ market position while being in line with other variables in the marketing arena. An effective pricing software helps balance the price floor (the lowest price for your product or service at which your business will end up with a deficit) and the price ceiling (the highest price beyond which no one wants to purchase). For more about policy, see the related information about Dynamic Pricing and business rules below.
Pricing Software Functionalities
- Real-time pricing. This includes pricing rules, and benchmark, promotional, customer, and exception pricing.
- Better pricing decisions. Pricing software assists decision-makers in anticipating the impact price changes will have on the business. Visual pricing summaries provide information about where you are losing income if prices are too high or losing margin if they are too low.
- Improved price optimization. This means you are assured of getting the highest possible price and, at the same time, sustaining profit and revenue development. A readily available sales history allows you to quickly see areas of margin leaks.
- Automatically handling of rule conflicts, such as promotions.
- A complete audit history. Compared to the limited window that Excel presents, pricing software records all changes running now and historically. This provides you with the ability to question what occurred before and to record the rationale of pricing changes.
- It moves you away from a cost-plus approach. This sets you on the road to price segmentation and value-based selling.
- Regular updates on competitors. Pricing software can allow you to see your competitors’ prices hourly, daily, or weekly. This gives you a leg up on your product lines versus your business rivals’.
- Strategic pricing opportunities. With guidance for up-selling and cross-selling, you can identify important pricing prospects and maximize deal sizes.
Good Points and Vulnerabilities
Like everything, pricing software has its good points and not-so-good points. We can summarize the good points in general as:
- Ensuring enhanced compliance of pricing policy
- Reducing the amount of pricing exceptions
- Delivering infinite price reporting and monitoring scenarios
- Extreme configurability
- Expands price differentiation at the sales level across customers, channels, and products.
Pricing software’s vulnerable points are:
- It has limited capability to reveal a customer’s inclination to pay in price points. A historic view is restricted when pricing with low-performing products and new customers.
- It cannot implement your pricing plan automatically.
- It cannot interpret price analyses for use as a basis for developing suggestions on the best course of action.
- The salesforce might resist off-the-shelf problem solving.
- It cannot replace genuine pricing strategy. Some problems require input from pricing specialists such as whether to follow a price skimming plan, whether to establish a higher price, or whether to implement penetration pricing to improve market share.
It’s best to manage expectations and make sure your office is cognizant of potential problems. Smart companies have the basics like pricing strategies and support procedures in place before jumping in and attempting to implement a pricing-software solution company wide.
Dynamic pricing is a method of setting prices that is highly flexible. Sometimes called “real-time” pricing, it has the ability to adjust to market and business changes freely and quickly. Pricing bots do the work of adjusting and setting prices per business rules, standards that describe an organization’s policies and procedures. Typical business rules include customer location, time of day, day of the week, demand level, and competitor prices. Dynamic pricing also takes into account big data and big data analytics, which can predict the price a customer is willing to pay based on personal, buying, and business information. Although contentious at this point in time, big data gathering and analysis is legal and widely used. For example, the public has embraced its use in buying airline tickets and for car rentals.
Dynamic pricing is in contrast to fixed pricing. Fixed pricing is an un-changing, standard cost that a person pays for a service or product. In some respects, you can compare a fixed price to a fixed cost in industry, for example, the cost of production materials or facility rental every month which remain steady. It is a price businesses determine based on the cost of materials, labor, facilities, equipment, advertising, insurance, and other factors.
Dynamic pricing requires analyzing data to make the best pricing decisions. Companies obtain this data from pricing software that uses algorithms and AI to calculate it. The algorithms are accurate and dynamic for three main reasons:
- They can process more information than teams or individuals.
- They employ economic theory and progressive statistical methods unavailable to the average person.
- They work continually.
It is not necessary or even desirable to understand algorithms and AI fully in order to appreciate the part they play in pricing software. It would take a Ph.D. economist or mathematician for that. A broad, general perception of these processes is adequate.
An Extremely Simple Explanation
It starts with your fixed price versus the variable price, which says that prices increase as demand increases but decrease when demand is low. Computer algorithms then look at how prices change daily throughout the year to give you the maximum, best price to charge on any given day. Because many factors can influence this daily price, such as the time of year (holidays, no school), the weather, shopping habits, competitor prices, customer location, the stock market, etc., companies turn to pricing software’s ability to formulate dynamic pricing to determine what price to charge.
The Large Part You Play
Algorithms and AI lack the experience and intuitive wisdom you and your associates have gained through years of operating in your specialized fields. This includes knowledge of your customers, their habits, and their needs. That type of information is not easily quantified, which is why it is necessary for you and your associates to make wise decisions based on the data and information pricing software gathers and organizes, and to remember that the software can’t make pricing decisions and determinations for you.
With a progressive ERP approach and the most accurate pricing data available, you greatly enhance your efforts toward attaining and maintaining profits.