Price Optimization Models are mathematical programs that utilize algorithms to calculate how demand varies at different price levels, then crosses the data with information from the organizations cost structure and inventory levels to recommend prices that will maximize profits.
The modeling allows companies to use pricing as a powerful profit leveraging tool, which in many organizations is often underdeveloped. Price Optimization Models can be used to establish pricing for the company’s different customer segments by simulating how each segments customers will respond to price changes with data-driven scenarios. Due to the complexity of pricing many items in highly dynamic market conditions, modeling yields results and insights that also aid in forecasting demand, developing pricing and promotion strategies, inventory level controls and improving overall customer satisfaction.
- Revise Customer Segmentation and select the preferred optimization model to determine required inputs and desired outputs.
- Research customer purchase decision process and understand what each segments assign value to.
- Collect historical data, including inventory levels, technology advances, product life-cycles, company’s prices and promotions, competitors’ prices, economic conditions, product availability, seasonal conditions and fixed and detailed cost structure.
- Revise the organization’s value proposition and set strategic rules to guide the modeling process clearly stating any suppositions to be used.
- Filter and arrange data, upload it to the model, run the model and revise results.
- Create a decision-making processes which utilizes the results from the modeling process with additional input from key decision makers.
- Monitor results and update data input continuously to improve the process accuracy.
What does the Price Optimization achieve?
- Price Optimization Models yield three strategic elements:
- Pricing Strategy
- Value of the product or service offered to both buyer and seller.
- Tactics to manage all variables which impact profitability.
- Price optimization works well for companies with a stable base of long life-cycle products—grocery stores, drug chains, office—supply stores and commodities manufacturers
- Aids in setting from temporary to fixed prices for products with long life-cycles, newly introduced products, product bunds, special promotions and loss leaders.