The Ultimate Guide to Price Analytics Software
Big data and analytics are now common phrases in the modern world. That being the case, it is surprising that many large-scale business organizations still fall at the first hurdle when it comes to using the technology on offer for practical pricing uses for the plethora of data available at their fingertips. These days, most companies have all the sales and transactional, product and customer data they could ever wish to have stored in their CRM (Customer Relationship Management) and ERP (Enterprise Resource Planning) systems. If you’re not using all that data to inform the smartest and most profitable pricing of your products, then you are simply guessing what your optimal prices are. Getting the most out of the data you already have, effectively leveraging the data that already exists in your business can help you quickly identify potential areas to adjust pricing strategies, capture additional profit opportunities and not leave millions of profit dollars on the table. This is where the role of pricing analytics comes into the picture. Join us as we provide you with ‘The Ultimate Guide to Price Analytics Software.’
At Pricefx, since 2011 we have assisted companies across all ranges of industries to dramatically improve profitability and market share by defining optimal prices and pricing strategies with price 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 begin, let’s dive into what price analytics software is, how it works and what it does. We will close with who it is for and who it is not for and look at the best price analytics options available on the market today.
What Is Pricing Analytics Software and What Does it Do?
As discussed above, pricing analytics is all about using your existing data to make informed pricing decisions (such as knowing who your customers are and where those customers find value in your products) on the road to better profitability for your company.
Getting a handle on your pricing analytics can help you understand how price changes will affect your overall business and optimize your pricing strategy to maximize your unique set of desired business outcomes.
Pricing analytics are the metrics and associated tools used to understand how pricing activities affect the overall business, analyze the profitability of specific price points, and optimize a business’s pricing strategy to maximize desired outcomes such as maximized profit, revenue or whatever goal that your business is looking for.
Data alone will not solve your pricing problems BUT having a strong handle on the reasons behind past performance—in other words, basing your decisions on pricing analytics instead of guessing—can go a long way towards improving your future performance.
But how does price analytics software do that exactly?
Pricing analytics is analyzing the way to look at data, but pricing analytics software will specifically consider two foundational key metrics on the route to increasing profitability for your organization – the pricing waterfall and the margin bridge (also commonly referred to as ‘margin breakdown’).
The Price Waterfall Explained
The price waterfall is a simple visualization tool that offers incredible pricing insight and is easily understood. Looking at the waterfall graphic image below, it is quite clearly displayed how distinct factors influence the prices of your products and the cumulative effect of all discounts and rebates on your company’s profitability is plainly visible.
Most often, the price waterfall chart begins with list price, but it can also begin with any base price that discounts, allowances, rebates, and other 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 arrive at list price to invoice price and then further on, applying your rebates on the pathway to pocket price. Variable costs are also sometimes added at 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.
Explaining the Margin Bridge (aka Margin Breakdown)
On the flip side, the margin bridge (also commonly known 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 for the difference.
There are three major components that can explain the gap:
- Price effect – A deviation due to 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.
Looking below at an actual price analytics software screen shot, it clearly displays an example of how a business margin was impacted from one quarter to another. Looking closely at the image 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.
The metrics of the price waterfall and the margin breakdown are the factors that are the foundations of price analytics software and will drive your company’s profit. However, for the results to have significant meaning and insight for your pricing, you will also require a certain level of understanding of your business and your desired outcomes. Consequently, each company will have its own unique pricing analytics fingerprint for the software.
The Difference Between Price Analytics Software & Business Intelligence Software
Looking at the price waterfall and margin bridge/breakdown functionality mentioned above that kind of capability is not something that you could look to leverage manually with ‘out of the box’ business intelligence software (BIS). BIS can collect, organize, visualize, and analyze data accumulated through your business operations, but not supply pricing insights.
If you are seeking a precision tool with which you will be able to surgically analyze your optimal prices so you can explore your pricing at a granular level to identify drivers for value and uncover segments, patterns, and opportunities you never knew you had, then price analytics software will be what your business requires.
Business Intelligence Software will not supply the same level of significant pricing insights (although it will be able to display your outcomes very nicely in a tidy graph or pie chart).
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 your organization decides to move to price analytics software, the volume of the data you require to assist in price decision-making may initially come as a shock.
The levels of analytics options required to analyze your data can be divided into three distinct levels. No one type of analytic is better, or more important than another. In the form of analytics symbiosis, they complement each other to provide your business with a comprehensive view of the competitive market you are involved in, and how you can compete on price using:
- Descriptive Analytics – Provide insight into the past and answer: “What has happened?”
- Predictive Analytics – Understand the future through modeling and forecasting to answer: “What could happen?”
- Prescriptive Analytics – Apply price optimization and simulation to advise on outcomes and answer: “What should we do?”
Artificial Intelligence (AI) enters the price analytics software equation at the prescriptive level and can help you better segment customers and products.
That means helping you to put together better quotes, offers or prices that are customized to each client and as a result, are more appealing to your customers.
Taking that one step further, AI can help you to optimize your operations and your products to better reflect their value, predict what your customers want and how much they are willing to pay.
A Price Analytics Software Use Case Example
Imagine yourself as Pricing Manager of a large electronics retailer selling your products both in your bricks-and-mortar locations and online stores to a diverse set of customers spread across different regions and countries.
Consequently, due to the diversity of your customer base, you are presented with a significant challenge when it comes to organizing your pricing: how can you ensure the optimal price is being used in the right location and at the right time? It is too expensive, error-prone, and time-consuming to analyze thousands of products manually.
You will need a data-driven pricing solution to set prices centrally while simultaneously flexibly pricing at a regional level. The tool you need will match both your online and offline prices and be competitive with your business rivals’ prices.
Use price analytics software to replace performing those tasks manually.
In a dynamic 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.
Price analytics software can recognize the cost levers ASAP before they eat into your profit margins. Doing that manually is not a feasible option.
With price 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, or whatever else your desired business objectives might be.
The more you use price analytics software, the better your company can meet the needs of its customers and be more profitable along the way. You can also co-ordinate your own online and offline prices, all the while receiving a clear picture of your customers’ buying habits and acquire important insights into how different customer groups behave when buying your products.
Who Is Price Analytics Software Right For?
Price analytics software helps companies to receive the best price for their products and increase profits for their organizations.
Extending that logic, price analytics software should add value to every business, right?
Maybe so, but some businesses may be better placed to take advantage of the technology than others.
Business organizations best suited to benefiting from price analytics software will be those companies that are looking to:
- Make dramatic improvements to their profitability and market share by defining optimal prices and pricing strategies.
- Unlock extra revenue and margin that can be generated by ‘quick wins’ repairing the most glaring cases of price misalignment or leakages.
- Increase operational efficiencies, and;
- Align stakeholders with their pricing strategy.
Who Is Price Analytics Software NOT Right For?
Companies that are smaller or have not yet reached a compelling level of pricing maturing may not be able to benefit from price analytics software.
For example, if your company does not have an experienced pricing team, you may need to ask yourself an honest question if your organization can give price analytics software the attention and demanding work that is required to enhance your pricing processes.
Price analytics software can be complex to administer and implement, and that could explain exactly why many companies are not yet using it in their daily course of business.
When implemented correctly to provide pricing insight, price analytics software can have a substantial impact on how businesses make decisions, and on their profitability.
Having the resources available to dedicate to the implementation of price analytics software is critical to its success.
If your organization is not ready nor has the available resources at hand to implement price analytics software, learn about how a System Integrator Partner can help you to get it done in the article below:
That’s Great – Which Price Analytics Software is Best for Me?
Now you know how price analytics software works and the powerful pricing insights it can supply for your company and the ways it works to achieve/maximize whatever your company’s own unique business objectives might be.
If you have already established that cutting edge price analytics software like that offered by the award-winning Pricefx solution or similar is something that can help your organization achieve its business objectives, and you may be wondering which one is right for you.
Check out the list below of 6 of the best price analytics software tools (other than Pricefx) and how compare:
On the other hand, if you would like to dive a little deeper into in-depth reviews of these 6 best price analytics software options (and importantly as industry leader how Pricefx stacks up against them), check out the handy article below:
Of course, if you are definite that the Pricefx price analytics software solution will be best for your business, please feel free to contact one of our team members now:
About the Author
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.