The Ultimate Guide to Price Optimization Software
December 8th, 2022 (Updated 03/09/2023) | 12 min. read
Guessing the right prices for your products is a bit like playing beer pong blindfolded. You may hit something, and the ball will land somewhere—but it probably won’t be anywhere close to the cups and the ensuing effects could be significantly worse for your business than any personal affects you might feel from a hangover. Setting your prices based on your production and delivery costs, or your competition’s prices might get you closer—and you may even hit the cup occasionally. However, for most business organizations, there is always plenty of room for pricing improvement and that is where pricing optimization software enters the game. Optimizing your pricing to balance value with profit can have an incredible impact on your company’s success—find the right price, and everything becomes smoother, from marketing, to securing sales, and of course, profitability and growth. Join us for the journey through this article into an ultimate guide to price optimization software.
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. With that level of expertise in price optimization and its overall role in pricing in general, we are in a prime position to help your organization become more efficient and profitable in your pricing.
Let’s first analyze exactly what price optimization software is and what it does, before we dive deeper down into the role of Artificial Intelligence (AI) and Machine Learning (ML) in how it works. We will close with who it is for and who it’s not for and look at the best price optimization options in the marketplace today.
What Price Optimization Software Is & What it Does
Price optimization software assists organizations just like yours to find the price point for your products and services that is most likely to help you execute your company’s unique set of business objectives (no matter what your company is looking to achieve – from increasing revenue or even sales volume through to positive effects to your company’s bottom line like maximizing profit).
Drilling that down even further, price optimization software allows you to find the right price but at the right price for the right value provided to the right customer in the right market segment, and at the right time.
The pricing strategies that can be affected by a price optimization approach can include: increased margins, volume, revenue, or market share, driving customer behavior, finding the right balance from a supply and demand perspective, and much more besides.
Price optimization software allows you to optimize your chosen desired outcomes through optimum pricing.
Those desired outcomes could be anything from maximizing sales to minimizing cost to serve and all points of the business outcomes radar in between.
Should you choose to, with price optimization software, you can even simultaneously find the right balance between a range of potential outcomes by setting that price ‘just right’ in the ‘Goldilocks Zone’.
How Price Optimization Software Works
Price optimization software analyzes a wide range of your company’s internal and external data to calculate where the perceived value of your offering lies and then it recommends price points (or approved ‘pricing corridors’ for your salespeople – with a bottom and a top pricing figure) based on your customers’ willingness to pay.
Advanced price optimization technology gives your business market visibility, and therefore the opportunity for you to select and implement the best pricing strategies to use with certain products or customer groups.
You can even take that level of pricing granularity down a few notches to establish regional or seasonal pricing strategies, to plan discounts and promotion cadencies and strategies, in addition to selecting products to package and your cross-sell in combination or ‘bundling’ selling products to achieve maximum effect on your desired business outcomes.
However, not all price optimization software is the same.
Consider the following information to get a handle on which of the two following models (AI or ML-informed) of price optimization software best suits the pathway to achieving your organization’s unique set of business outcomes.
ML-Powered Price Optimization -’Optimized Negotiation Guidance’
Price optimization software powered by Machine Learning exclusively (without an AI component) allows for pricing your products and services by segmentation and by demand modeling.
Firstly, price optimization by segmentation is a process whereby your prices are differentiated based on your customer’s willingness to pay for them. What that means is price sensitivity can vary widely across different segments; in other words, priced differently from customer to customer, from product to product, and again, different pricing in some of the various locations in which sell your products. For example, if your costs of production vary in different countries, or you have decided to adopt regionalized business strategies, you can use ML-powered price optimization to define the prices you offer in each of the different locations.
Demand modeling refers to the price elasticity of your products. You can use ML-informed price optimization software to set a price that will influence the number of units sold of one of your products. For example, you can segment customers into smaller groups that have comparable price responses and similar levels of demand and calibrate the price elasticity on an ongoing basis for each segment, allowing very exact group pricing applied in a precision manner.
Identifying that ‘just right’ price or perfected ‘pricing corridor’ will help you to maximize your profit or whatever your organization’s primary business outcomes are.
AI-Informed – ‘Multi-Element Waterfall’ Price Optimization
Price optimization software powered by Multi-Element Waterfall Optimization is valuable to optimize at any point/s of your pricing waterfall simultaneously.
But what does that mean exactly?
In other words, AI-informed price optimization allows you to achieve multiple and competing business objectives all at one time by creating an AI paradigm that imitates your customer, your processes, and the marketplace.
A swarm of small interacting agents, each with their own job to do (for example, to protect your margins is just one but it can be combined with many others), can choose how they go about their tasks with free will, constrained only by rules around behavior and interaction. This autonomy of each agent is what makes AI-informed price optimization so powerful.
When you add a new business objective (let’s say, increase sales for example), each agent will work as part of the greater army of agents to achieve this objective within the context of your entire portfolio and waterfall while also working on the first objective you set to begin with (remember – protecting margins). And it will do so within the parameters you have set, like: “Must give specific discounts to certain customer groups,” or “No price increases of more than 10% per annum.”
That means that you can simultaneously optimize various elements of your pricing waterfall.
A Practical AI-Informed Price Optimization Use Case Example
Imagine you own a tire company, and you sell three types of tires: high performance tires for sports cars, tires for tractors, and winter tires for most standard cars.
Having determined your pricing strategy for each of your three products, you have decided that you want to:
- Increase Sales volume on your high performance sportscar tires to lower production costs
- Have a standard 20% profit margin on your tractor tires on online orders, and a 30% profit margin on in-store orders.
- Have a standard 15% profit margin on your winter tires and;
- You want to apply all these rules in every market you sell in except for Norway, where a standard 25% profit margin applies across all your tires.
With AI-informed price optimization software, these five business outcomes can be built into a single rule for your pricing software system to calculate your global prices automatically.
Who is Price Optimization For?
Organizations most likely to benefit from price optimization software will have a genuine interest within their leadership group on understanding where and what the potential benefits of price optimization are, and who will then champion the transformation from the top.
Price optimization software will be best for those teams that have previous price modeling experience. If your team has previously created a pricing model in Excel and has already been doing some level of optimization, then your team knows what the work entails and how hard it is. As such, your business has no illusions that implementing pricing software will be easy.
However, you are aware that price optimization is more than worth it. You know that a price optimization solution can increase profitability dramatically by delivering the capability to go after key top-line metrics, allowing you to scale up your optimization processes and test different models to discover what will work best for your business.
You’re also aware that it brings increased agility so you’re better able to quickly adapt to changing conditions in the market. Any business that survived and prospered during the COVID-19 pandemic is more than aware how much your pricing had to shift between 2019 and 2020. Even pricing models built with the most powerful price optimization software can become obsolete in a flash.
Do not let less-than-perfect data deter you on your price optimization journey. If you understand the limitations of your data—that is a marker of pricing maturity.
So, if you and your pricing team are asking yourself questions like; “What is the value of my products in the marketplace? Is there a better way to segment my customers? And create differentiation of price across different customer and product segments? Do I have a sharp vision of what I’m trying to achieve?”
Know your data – you need clean and hard data (customer, product, and sales/transaction data) to do it right – to calculate how much customers will pay for your product or service. Data points may include information on demographics, inventory, supply and demand, historical market specifics, sales metrics, churn rates, product features, promotions, rebates, discounts, perceived value, and price sensitivity, among others. Don’t limit yourself if your data set is less than perfect (it rarely is), but know you’ll need as much of it and as uncorrupted as possible.
If you do find these things to be true for you and your organization……..
… then price optimization software is for you.
Who is Price Optimization Software NOT FOR?
At Pricefx, we have noticed a rise in organizations wanting to implement price optimization software because they consider it is something that successful businesses do— the feeling is that if they invest in AI-informed price optimization, somehow it will cure all their pricing ills.
However, there is a lot more to price optimization than simply following a trend and plugging in some software. For a start, it is not as simple as downloading Google Chrome and pressing the ‘go now’ button
Having been in the price optimization software space for more than a decade now, we are firm believers in the crawl, then walk, then run approach to the technology.
Price optimization software is a tool that helps walkers to run. And while crawlers are more than welcome at Pricefx, we feel we would be doing a disservice to our customers by selling them a solution that they are not ready to make the most of. Here are our thoughts on who should and who should not be considering implementing price optimization software;
- To get value out of your price optimization solution, you must already have a good understanding of your operational needs. If you don’t yet have systems in place that simplify the process of operations, then you’re not going to be able to implement a price optimization solution because you’re not going to have enough time or resources to do it.
- Another group we think price optimization software just isn’t built for are those who don’t consider price as a function to be an important lever. If cost-plus pricing is where your pricing ambitions end, and there is no strategic push within the company to understand pricing, then price optimization software will simply be a financial burden you don’t need.
- If your digital maturity is not ready for the upgrade, then you are pumping bad data in and hoping to get good prices out. At Pricefx, we enjoy showing off the miracles our price optimization solution can perform in demos, but we always become a little concerned when a prospective customer wants to see an exact model for their business in action. It’s a red flag that perhaps they do not recognize the full complexity of how price optimization works, and that they are not ready for the transition. In order to build a solution that really delivers for you, we first need to understand your specific pricing processes and data blocks and to work closely with you to ensure your pricing tools match your pricing goals.
That’s Great – Which Price Optimization Software is Best for Me?
Now you know how price optimization software works and the powerful pricing insights it can develop for your organization as a pathway to achieving whatever your company’s unique business goal may be.
You may already know if innovative price optimization 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 optimization software tools (other than Pricefx) and how they stack up.
However, to dive a little deeper into reviews of these 6 best price optimization software variants available in the marketplace today (and how Pricefx stacks up against them), check out the handy article below;
On other hand, if you are certain that the Pricefx price optimization software solution is what you require, contact one of our team members now: