Data Determination

Price optimization is a complex problem. On the one hand, historical sales and price data are easily available (although massive and tough to navigate) and provide one source to analyze pricing information. Alternatively, consumer data can be collected within a product category to drive pricing optimization which is more expensive to obtain. What data should be used to analyze price? Is there a tried and true method?

Enabling Proper Metrics
According to Jiri Nechleba, president and CEO, 4R Systems, a product lifecycle "intelligence" company, by tapping historical sales and price data, pricing changes and resulting sales can be examined to see how purchasing shifted. "Providing the data has enough changes in price across the various products in a competitive set," says Nechleba. "A cross-elasticity matrix would then indicate how changes in price for one product change demand for it, other products and the category as a whole." Armed with this type of data, companies can optimize price structure to either generate the most revenue or profit. "That's in the ideal world," says Nechleba. "In practice, measuring the cross elasticities in pricing between products is a difficult task for a number of reasons."  First, the competitive set is dynamic with products constantly being delisted from shelf and new ones introduced. "These effects can often be subtle with their signal often small in comparison to normal fluctuations in sales."

The Influence of Consumers
Consumer research based data is also an effective pricing method when used to build a model of purchasing drivers in a particular category. Different products deliver different benefits. These perceived differences are often the drivers of consumer choice. 

For example, in analgesics, Tylenol is perceived as having lower side effects than aspirin. For different consumer segments, this difference in perception may have varying importance. A chronic user might prefer Tylenol over aspirin as the side effects may be significant with frequent and extended use. An infrequent user may not be as concerned with side effects. "For each of these users, pricing differentials may be able to influence purchasing," says Nechleba.  "The infrequent user may purchase Tylenol because it is cheaper. However, the chronic user may never switch to aspirin even if the price is half that of Tylenol."  Understanding the differences in consumer perceptions between product alternatives and the importance of those differences in their purchase decision, relative to price, is a key component in understanding how to price products.

For manufacturers, Nechleba says pricing is a strategic question that needs to consider the value of product benefits and the competitive marketplace. "Beyond the general marketplace, retailers create a specific market context which is much more tactical." All offerings are not available and retailers typically try to tailor their offering to meet the needs of specific market segments and, in doing so, generate the most revenue. "An important part of pricing is aligning both the strategic and tactical elements," says Nechleba.

Pricing Against Trade Promotions
Unlike other industries that deal with the complexities of pricing issues, consumer goods firms also have to worry about how pricing effects promotions. "The problem lies in how to best manage trade fund allocations and promotions for your retailers or channel partners," says Kosin Huang, Yankee Group. "Better managing the marketing spend to reach sales and profitability targets are a big concern. Consumer goods firms need to optimize prices for promotions as well as associated events such as displays and ads."  To ease the price optimization/ trade promotions burden, Huang says consumer goods firms should find an integrated solution that helps optimize promotions, prices, and have it tied to their demand planning system. Before any type of IT investment can be made, Huang suggests that consumer goods firms try to get their arms around the three following concerns:

1. How the company currently handles its price and plan promotions

2. What the customer is willing to pay

3. How to shape demand to create better promotions or markdowns

"Many companies I speak with have difficulty understanding where specific prices and promotional programs come from and exactly where this data is stored," says Huang.  "They have even less insight into demand and what customers value." Lastly, a majority of manufacturers do not know how to shape demand through their promotional programs. These are the three key areas pricing software can help. "Technology lends flexibility and speed to quickly make good trade funds management decisions for each specific customer, partner, or sales channel," says Huang.