Price optimization - what do you need to know and how to get started?
General, Price-monitoring, Price-optimization ·Until fairly recently, price optimization has been connected primarily to certain industries that by nature have limited inventory, such as airlines and hotels. This is not strange, having in mind how complex and time-consuming price optimization is. It requires a lot of time and dedication - performing different analyses, gathering a great quantity of data in order to be able to have a good enough understanding of customer behavior. If you add to this the number of products for which the price optimization needs to be done at one time, it’s clear why this wasn’t so used solution.
However, things are changing. Thanks to all the changes in the IT world, especially in terms of machine learning, the possibilities for gathering a huge amount of internal and external data are much greater. Nowadays, there are developed ways to set optimal prices and track their changes for hundreds of products in real-time and on an ongoing basis.
For most companies, though, there’s still plenty of room for improvement in this area. Price optimization can have a huge effect on a company’s success - once you find the right price, accomplishing growth and profitability will come naturally.
So let’s get more familiarized with what price optimization is and how to start using it.
What is price optimization?
Price optimization is a sort of mathematical analysis used for getting a better understanding of how potential customers will react to the prices (and their changes) that you set. By using it, you’ll be able to determine what prices will help you to meet the company goals.Price optimization is to some extent similar to dynamic pricing, with the main difference that dynamic pricing can be a pricing strategy on itself, whereas price optimization is a process that should be included in any price strategy that you use.
Why do many companies fail at price optimization?
Performing price optimization requires a lot of time and effort, but the results can’t be visible right away. This is just a great starting point, but as with everything, you’ll need to be patient. That’s why a lot of companies give up and go with the easier, but the worst possible solution - price guessing.
Another very common mistake that companies make is defining how many price plans, or price levels will they have. This is an important point since having too many or not enough price level can push customers away.
There is one more point in price optimization where companies fail, or better said, don’t use it in the right way - relying on discounts. Discounts are not necessarily a bad thing - they can be extremely useful if done in the correct way. But, the problem arises when companies try to use discounts for getting better results, but without performing any changes in their pricing strategy. In other words, they see it as an easy way out to get quick results. However, if you perform price optimization in the right way, this will become just another obstacle on the road that you’ll successfully overcome.
How to get started
Finding what product prices will help your company to meet the set goal is not an easy task at all. Since procrastinating won’t do you any good, you need to determine how to start this slow, but fruitful process.
1. Have a better understanding of your customers
It’s not accidentally that this is the first step in the price optimization process. In order to set the right prices, you need to be fully aware of who your customers are. You need to find out their willingness to pay for the products that you are offering. For sure, there are numerous online tools that can help you with this task, but at the end of the day, no one can know your customers better than you. Therefore, learn as much as you can about your customers - try to put yourselves in their shoes, do some research, send surveys, etc. Where there is a will, there is a way.
2. Analyze the data
Once you’ve collected the data, your next step is to quantify it - to understand what that data actually means both for you and for the customers. Now it’s time to look for patterns in the collected data. There you’ll find out how willing different segments and personas are to pay different prices for your products. Once you have this information, it’ll be much easier to avoid those mistakes when deciding on price plans.
3. Set the right prices and monitor them
The hardest part is now resolved, though, there is still more work to be done. Indeed, it’s crucial to set the right prices, but price optimization requires to constantly track those prices on a daily basis. You need to continually collect data and analyze it in order to make sure that what you’re offering still meets your customers’ needs and pricing requests. However, competitors are another aspect that you need to keep an eye on. It will be very difficult to monitor all the competition by yourself, so it would be very useful to find a tool that can help you with this time-consuming task. There are a lot of price monitoring tools on the market, but Price2Spy might be just the right solution for you, especially when they got an award for a product leader in a category of software eCommerce products.
Final thoughts
It doesn’t make much difference what are you selling - having the right price optimization strategy is a must. Without it, many problems come as a consequence such as missed opportunities and the most important low revenue. Therefore, price optimization is something that you can’t afford to miss on.
Do you remember your price optimization beginnings? Was it difficult to understand all the metrics or it just came naturally? Share your experience with us in the comment section below.