Part 3: Price Optimization Software: Focus on What Matters

Part 3: Price Optimization Software: Focus on What Matters
December 11, 2017 Mark Schwans - Senior Director, Solutions Marketing

This is the final installment of our three-part blog series on the theme of real value in price optimization software v. market claims (see Part 1 and Part 2 if you’re just now joining us).

Some will claim “optimization,” but if you look deeper you will see they are using rules-based pricing, aligning their prices to support a handful of very basic pricing rules and forecasting the outcome that results from those decisions – whether good or bad.

Again, this is another play on words done for years and part of why advanced price management or price optimization got a bad rap. Many vendors, and not just in pricing, would claim a tool provided optimization when all it did was follow a whole bunch of rules, many of which conflicted with each other, that were predetermined. In the end all it did was automate and systematize your business practices, but it didn’t find any opportunity to improve your business.

Rules in pricing were good for keeping consistency and systematizing your business. They originate from whatever assumptions you had in place at the time they were encoded, but with transformed retail, do these rules still hold true? Does a discount have to be at least 25%? Do they take into account the price sensitivity your shoppers have on your assortment? Understand which competitors truly impact your demand? Which items should you have a competitive strategy against and what that strategy needs to be? Or are they merely conflicting with each other, putting a choke hold on your pricing holding back your pricing from achieving its full potential?

When trying to find new improvement opportunities in your business, the questions start to change. Rather than be within 5% of my competitors or maintain a competitive index of 1.05 while maintaining price gaps and ending number rules, the questions grow more complicated – and the answers can deliver a much greater positive impact on your business:

  • What is the optimal price to entice shoppers to purchase while remaining competitive, achieving strategies and improving margins?
  • On which items, at which locations?
  • For which competitors?

There is an over-abundance of science and technology that creates a lot of noise. For retailers to make the right choice they need to get below the surface of the iceberg and question the science. Can it:

  • Determine which items my customers actually care about?
  • Understand which competitors matter and truly affect my demand for across locations/channels?
  • Predict how a consumer will react when they see the difference in my price versus a competitor?

This doesn’t stop just for competitive considerations. The same type of rules-only approach to determining omnichannel pricing is similarly narrow-minded. Should online and in-store prices always consistent? Should there be a fixed-ratio price difference? Lower online? In an omnichannel world, optimizing part of a business is like optimizing part of a customer.

Basic rules were great when you needed simple answers fast that you could control and understand. But relying on them leaves money on the table. More advanced rules-based pricing does kick things up a notch, but merely systematizes practices and provides better consistency and better forecast outcomes; it doesn’t determine the most optimal price while also adhering to pricing rules to deliver optimize results.

Analytics is a sexy term that doesn’t guarantee anything
So you have data, what do you do with it? Well, perform some analysis that could tell you what has happened or is happening. But historical analysis doesn’t predict what will happen in the future and if it does, odds are it isn’t prescriptive, advising beyond the problem to exactly what you need to do. OK, some perform predictive analytics to look forward. That’s nice, but how accurate is it? Also, what-if I wanted to change a variable? Well, let’s do some what-if’ing and play until you get something you like. This has been the standard evolution of analysis. And many people, consultants and vendors alike, would love to do this for you. I’m not saying analytics doesn’t deliver value. But claiming analytics doesn’t prove anything unless there is something else to back it up. Which brings me to a forward-looking viewpoint. “Predicting results is powerful, but directing strategic outcomes is game-changing.” Instead of thinking of just analytics, what if you could start with a strategic approach and see how to make it happen? How do you manage to that outcome? For example, what if management needs to find an extra 2% margin in your entire business, not just a category? Where can you find that? What trade-offs need to be made in your business? What if you want to increase your competitiveness and gain more market share? What items do you become more competitive on? Which locations? Which competitors do you go after?

These questions don’t just stop here but also speak to managing for fast-changing market dynamics. What will happen if a border adjustment tax is implemented and I want to maintain my margin? What if a new competitor opens up? How do you properly plan and adjust before and after that competitor arrives? What will this mean for your financials and most importantly, how do I respond intelligently? This is about strategically planning and directing outcomes to guide your business.

The market and analysts aren’t making it easy for you

Coming back to the beginning. Unless you have done this before and gone into the weeds of pricing promotion science, it is REALLY hard to initially get your head around it. Vendors want you to believe they do everything better than everyone else. Even analysts aren’t always creating those insightful reports to get through the clutter. And still, much of the media who don’t follow the space day in and day out often create additional FUD and confuse you on terminology. I’ve only begun to peel the onion above, and it still doesn’t begin to touch on things. But I hope this discussion at least helps you get started on your journey and formulate meaningful questions to guide you along the way. Peel the onion.