Ultimately, a business, especially a manufacturing business, succeeds by producing a product and then selling that product to a customer for more than it costs to make the product. It’s that simple, right? Unfortunately, not. Even in the most basic manufacturing businesses, many factors make the process more complicated.
What if that price is more than your customers want to pay? Then the challenge moves to cost reduction or product improvement. If you set your price lower than your customers are willing to pay, you are leaving profits on the table. It is critical to understand the market, so you’re pricing your product at the level to meet the competitive landscape.
Price optimization is the process of finding the right price level so that you can sell the most product at the greatest profit margin. Set your prices too high, and individual sales profits will be high, but the sales volume will be too low. Set your prices too low, and unit sales volumes might be high, but costs increase and profitability suffers. An optimal price matches the customers’ value expectations for the perfect balance in the spectrum.
A basic pricing truth: You can’t “discount” your way to maximum profits. Every dollar you price-discount is also a dollar less profit. Discounting more and more long-term reduces the customers’ value perception of your products and your company. You need to find the maximum value your customer perceives and have a pricing strategy at that value to satisfy both parties.
Goals of Price Optimization Processes
The foundational goal of a price optimization process is to find the pricing strategy to capture the highest profit from the total market potential of the products you produce. The market potential is limited by the value your customers perceive. Having your pricing align with perceived customer value, regardless of competition, is the key.
To make that happen, the proper fundamentals need to be in place. First, you’ll have to get buy-in from your entire organization, with all your business units committed to supporting the process. When you complete that objective, you’ll have to develop a strategy that is based on market data, and accurately reflects your customers’ view of your products’ value. Finally, you’ll have to set specific goals that the entire organization works toward in the implementation of the strategy.
Looking at the Data
To optimize your pricing strategy, you need data. Fortunately, most manufacturers have lots of data to work with. Historical data of your marketing, sales, and costs are essential for the process, as is similar data for your competitors. The internet, in general, provides another easily accessible data source. Having an ecommerce system with tools to provide a wealth of real-time data from “known” potential customers can be a game-changer.
An analysis of all these data elements gives you a picture of the market values and how your products are performing in the market. It also provides context which previously may have been unknown like impression share, unit stock status, freight charges, time of day, day of the week, etc. Some price optimization software tools also track pricing data for your competitors in real-time, giving you an accurate, current data set to work with.
What Your Competitor’s Data Can Tell You
Comparing your data to that of your competitors allows you to see where you stand in the competitive landscape. Do your customers believe your competitors’ products are comparable? Are you charging much less than your competitors? If you are, you’re losing money. Are you charging much more? In that case, you’re probably losing sales, which means that you are, again, losing money. Moving your prices relative to those of your competitors can shift your position in the market, but is it the fastest way to increase your value to the customer?
The biggest key in any competitive analysis is customer perception. Are the products directly comparable, or are price differences driving a customer value comparison that can change with more/better information?
What Your Data Can Tell You
Data you collect can also tell you which of your products’ features are delivering the most value to your customers, whether you are using resources efficiently, and whether your development and marketing processes align with your customers’ requirements.
All this data—and more importantly, turning the data into information via analysis—means little without strategy and tactics in place. You have to be prepared to make adjustments in product pricing, features, or marketing to align with the findings. Constant data analysis allows you to make these adjustments regularly so that you’re always moving towards price optimization.
Using Price Optimization Tools and Technologies
Optimization software tools are designed to make the entire process as easy as possible. The tools aggregate and analyze cost and pricing data, both from your internal sources and from your competitors, bringing the price optimization process into focus and keeping your goals in sight. As previously stated, ecommerce tools that include a robust analytics module can provide a bevy of data to perform various price optimization functions. Employing such a tool is often a good first step to define strategies before committing/investing in specific price optimization tools.
Staying Flexible with Your Pricing Strategy
No matter what market you do business in, that market is always in flux. Customers’ needs change, and the value they derive from your products change along with their needs. Your internal conditions change, and your competitors evolve. Price optimization is not something you do once. It’s a continuous process, and to do it effectively, you need to leverage all the tools at your disposal in an on-going, organization-wide process.
Bob Zastrow is the vice president of software solutions at GenAlpha Technologies, a provider of ecommerce, e-catalog and customer portal solutions for manufacturers. He can be reached at [email protected] or contacted via LinkedIn.Favorite