Companies put a laser focus on their income statement and focus on revenue, profit and volume variance, and the related drivers that are crucial for success.
NB: This is an article from Revenue Management Labs
Unfortunately, pricing analysis is usually given cursory attention. This is surprising as 1% of pricing has a higher impact than sales or costs on a company’s profitability. To truly understand why sales and profit are changing, pricing analytics needs to become part of your core management process.
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Pricing analytics is the structured, repeatable reporting that produces insights that enable optimal prices and the development of pricing strategies. It leverages diverse data to understand what influences customers’ purchasing decisions and then applies it to the company’s pricing requirements.
Pricing analytics is a business necessity for a host of reasons:
Benefit 1: Leverage insights from competitor price tracking
Competitor price tracking is effective if done as an ongoing process rather than an occasional study. Usually, companies track prices when the sales team receives information from customers, during annual pricing studies, or on an ad hoc basis. Not having a steady and ongoing process limits your ability to understand when competitors moved price, who moved first, and what was the related impact on volume.
Leveraging pricing analytics forces the diligence to track competitor pricing. Apart from analytics, organizations often experience corollary benefits related to customer retention and market responsiveness. Pricing analytics forces solid competitive data collection and helps companies act faster.
Benefit 2: Acquire more customer insights
Knowing which customers to cater to is crucial for companies to segment their customers into groups, going after the wrong customer segment can mean significant lost time and revenue. Hence, customer segmentation is primary to any pricing process as it helps determine which customers the company needs to focus on and which ones to deprioritize.
Once data is available, companies can group customers with similar behaviors and effectively target them with the most suitable strategy. This can be done through pricing analytics, which helps continually validate your customer segmentation, identify what customers are the most and least profitable and trigger you to respond with specific pricing strategies.
Benefit 3: Improve price elasticity analysis
Price elasticity is the measure of the effect of price on volume change or market demand. It is an essential metric to measure because it helps predict the behaviors of customers and identifies whether a price change will have a positive or negative effect on profit.
Usually, firms undertake an elasticity analysis when doing their annual price change or ad hoc business cases. This allows for point-in-time insights and is often done at a high level. Integrating ongoing pricing analytics ensures that companies are constantly monitoring shifts in price elasticity and can quickly react in a targeted manner.
Benefit 4: Identify the ideal time to deploy a discount management strategy
Companies often rely on offering promotions and discounts to boost revenue. Price reductions are an excellent way to acquire new customers and keep the current ones engaged. Hence, it is vital to know when to employ price reductions. Most companies take time planning detailed promotion strategies but lack the ongoing pricing analytics to monitor the in-market performance, leading to missed opportunities.
Pricing analytics helps companies estimate the most feasible discount management strategies. It can predict revenue at different price points allowing companies to set and adjust their discount management quickly.
Benefit 5: Enables enhanced forecasting
Achieving targets and meeting revenue goals are always at the forefront when it comes to companies’ objectives, however, considering long-term objectives such as brand image & operational efficiency also have a substantial impact on companies’ future-facing goals.
By setting optimized prices, and deriving the company’s past performance with high-level granularity, price analytics enables companies to pinpoint the exact areas where they can focus to meet their long-term goals and better predict demand.
Pricing analytics is a necessity for sustainably growing revenue. It enables answering basic market queries to make real-time pricing decisions to forecast future results.