Is my Price the Right one?
Every company has to put a price on what it sells, but many companies fail at this important task…
The stunning growth in the quantity and quality of competition data has enhanced the ability of companies to adjust prices to fit the market. Though some have succeeded in driving profits and expanding their market share as a result, many have not.
While firms typically sense that they can improve price setting and benefit greatly from doing so, they also lack a well-developed and thorough plan. In addition, a number of barriers that prevent organisations from developing and implementing an effective price optimisation strategy.
Approaching price optimisation
When setting prices, a company must reflect on its consumers, competitors, product and customer economics, and broader strategy.
– How sensitive is the consumer to the price of the product or service?
– How does your price proposition compare to that of the competition?
– How well do you understand the economics of your product and customers?
– Is the pricing coherent and aligned with the company’s competitive, product and consumer strategies?
How does your price proposition compare to that of the competition?
Among those in the retail and service sectors, competitor prices are often given greater prominence in the price decision than any other factor, as it is among the most important (if not the top) elements that affect the final purchase decision. A company can pick from a variety of pricing strategies based upon a variety of different factors.
The company can set a price to maximize profitability on each unit sold or on the overall market share. It can set a price to stop competitors from entering the market, or increase its market share, or simply stay in the market. With the rise in e-commerce sales, and the friction-less comparison shopping digital commerce enables, competition in the market has gotten much more aggressive and real-time.
Companies need to keep an eye on their competitor’s pricing strategy while setting prices to get the much needed competitive edge in the market. Comparing prices online is easy and customers are well aware of the monetary value of a product. These factors are also important considerations while setting the right price in e-commerce.
Some of the factors that companies have to consider when setting prices are costs & competition. In order to ensure sustained profitability, firms have to set a price that: covers the production cost, contributes to company overheads costs, and delivers suitable profits.
Conversely, competitors can exploit the opportunity presented. If company A’s prices rise, company B could institute a sales drive. This can be observed in the utility energy markets. Following a rise by one competitor, other competitors may seek to capitalise on a sales opportunity in the short term, and then follow the price rise themselves later on. Thus, the competitor that led with the price rise will see a substantial impact on volumes in the short term but little impact in the medium term once the competition matches their move.
Obstacles to overcome
Indeed, it will be difficult for firms to see the extensive benefits of an optimised price strategy unless they can overcome a number of obstacles.
Awareness of opportunity. The value of finding optimal price levels for goods and services only becomes clear when the customer value and price elasticity assessments have been made. Organisations that have not taken these crucial steps do not appreciate what they are missing.
Analytical capabilities. Pricing can require advanced analytical and statistical skills. Of the factors considered, this was believed to be the biggest constraint to developing a cohesive strategy by the companies we surveyed. Most companies are simply not staffed with people experienced in price optimisation. Therefore, a short-term solution may involve hiring outside help with those skills, though it is important to develop an internal team to handle the analytical measures for long-term success.
Useful data. It is common for us to come across companies that are covered by data, but this data is of limited use as it can not be used properly due to a lack of people, work experience or the right software to make the right decisions. So it is not enough to have only a quantity of data but at the same time, they must be of high quality and be able to be handled properly by the respective company in order to make sense.
Execution. Sometimes, corporate organisational structures simply do not allow prices to be varied in ways that thorough analysis suggests. For instance, a company in the Electrical industry identified that discounts would be more profitable in some countries than in others. However, the company was only able to advertise discounts effectively at a national level.
When corporate financial executives turn their attention to pricing models, dozens of questions quickly spring to mind: are my prices the correct ones? How can I confirm they reflect my positioning in the market? How do I know if I’m losing money?
Pricing questions like these are constantly top-of-mind with pricing and commercial managers, product managers, analysts and financial officers. Depending on timing, they can torment decision-makers to make hasty – and often poor – pricing decisions.
In the end, it boils down to simply this: good data = great pricing outcomes. Bad data = well, who wants bad outcomes? Here’s how to fix data pricing models for the better.
The correct answers to questions like these – along with good decision-making – lies in a structured and educated, simple approach to data accuracy and process. Correct and timely information in combination with the right tools can generate the most profit possible for your business.
Join TGN and Pricefx for this one-hour webinar which will cover:
– Why data matter?
– What data matters?
– Where to find the right data?
– What makes good data… good?
– How to make the most out of the data?
– Who will benefit from the data?