Price optimization in general mean pricing you product in an optimized way so as to retain customers as well as increase bottom lines.
Pricing is a very important function of Retail. Right pricing can fetch you strong and loyal customer base. With increasing competition in retail space, rising real estate costs and rising fuel prices, it has become more critical than ever. As competition is increasing, now consumers have more options to explore and make the best deals and stretch their dollars. With Real Estate prices shooting up, fixed costs are increasing for retailers whereas Fuel Prices are increasing the logistic cost. So, all these factors are contributing to higher prices which repel customers and result into losses. So in order to be successful we need to optimize our price keeping in mind all the variables affecting it including competition. This will ensure that we retain and grow our customer base. Moreover we need to consider various variables which affect the demand of the products too while pricing (we all know law of demand and its relation with pricing). These variables are seasonality, price elasticity, cross-elasticity between items, and inventory presentation.
In an organized retail chain with number of categories, and so many variables attached to pricing, it is really difficult to manage price optimization. Each variable affects price in its own way. So, retailers need an efficient pricing approach which is customer centric, margin maximizing, competitive and which optimizes prices at SKU level across the categories. The pricing strategy must be long term and must be implemented keeping in mind the product life cycle.
To manage this complex function, we have good price optimization applications available in the market.
- 
Rajeev Damani 
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September 6th, 2008 at 9:07 pm
Having had first hand use of these so called price optimization tools, I would have to say that they are far more trouble than they are worth. There is so little that they take into account as far as the correct price of an product - weather, competition, marketing etc. They also have no relationship on the expenses caused by their findings when it comes actual implementation in a store.
Multi-store retailers today should spent more time on creation of a Customer Value Proposition, Analysis of inventory by door down to the size level, and how to actually give a better Customer Experience rather than lip service.
September 7th, 2008 at 12:43 am
hi Rajiv Sir,
how effective these price optimization tools can be…i really doubt it…plz enlighten us more on this..
and sir plz put the ‘comment’ link at the end of the article not along side the heading…it becomes easier to proceed to ‘comment’ (customer-mapping as they call it!)
regards,
Jay
September 7th, 2008 at 12:32 pm
Hi Jay,
Thank you for the pointer, will be done asap.
September 7th, 2008 at 3:03 pm
Hi Jay,
With increasing complexities in pricing like EDLP, seasonal pricing, markdowns, discounts, demand variances etc. it’s becoming difficult for retailers to attain price optimization. It need retailers to manage large volume of data daily to achieve it like historic sales, trends, demand variables etc. So, most of the global retailers are using and have actually benefited from these applications as these have help them stretch their margins as well as increase sales. These applications analyze your data objectively considering all constraints given by you.
So, answering your question on effectiveness of these applications, I would say it will depend on the following:
1. Availability of quality data related to sales, trends etc.
2. Efficiency of the implementer to analyze these data.
3. Identification of all possible variables and their effect as well as providing all constraints to the application. Ignorance of a factor may produce wrong results.
4. Expert testing of the application before putting it into use.
5. Ability of the implementer to customize it to the needs of the user.
I must say these applications are very intelligent and it thinks beyond we can, but as these are also man-made, so, its effectiveness depends on the way they are used. These are very flexible so that user can add - remove constraints and variable from time to time.
Some of the leading applications are PROS, Vendavo, Zilliant, Profitlogic and by the large vendors like Oracle Price Optimization, SAP Price Optimization and SAS’s Revenue Optimization Suite which includes Price Optimization apart from Markdown Optimization and Promotion Optimization.
Note: I am not currently working on this space, so I have a limited knowledge of this area. My all analysis is based on my research on Price Optimization, so, correct me if I am wrong some where.
September 11th, 2008 at 10:33 am
Getting pricing right is always a challenge in an economic downturn, as decreasing
demand, excess capacity, and greater price sensitivity all conspire to drive down
prices. In most downturns, the cost of raw materials, feedstocks, and other upstream
supplies—as well as the cost to serve customers (for delivering goods, for
example)—tends to stabilize and even decrease as business activity slows. As a result,
decreases in downstream prices are at least partially offset by lower upstream costs.
But in the current environment, not only is weaker demand from the end user
making it harder to maintain prices, but significantly higher and more volatile input
costs mean that companies caught in the middle are getting hit from both sides.
What’s a business to do? In this unusual downturn, companies need to manage the
profitability of individual customers and transactions with greater precision,
develop richer insights into their customers’ changing needs and price sensitivities,
and understand more clearly the microeconomics that shape their own industries
and those of their suppliers. We’ve assembled six tactics aimed at maintaining the
best balance possible between sales volume and profit margins in the current
challenging environment.
Watch for sudden shifts in price structure
Companies should be vigilant in monitoring pricing policies that reduce
revenue—such as volume discounts, rebates, and cash discounts—as well as
cost-to-serve, including freight and sales support. In the current downturn, rising
costs and declining demand can cause these elements to change more dramatically
and quickly than they have in the past. Rapidly increasing fuel prices, for example,
are putting intense pressure on delivery costs. Declining demand means that some
customers may be collecting volume discounts they no longer deserve. Best-practice
companies are reviewing much more frequently their pocket margin waterfal l s ,1
which show how much revenue companies really keep from each of their
transactions, and adjusting their pricing policies accordingly—for example, by
adding delivery fuel surcharges to every order. Without the extra attention and
quick action, erosion at all points of a transaction can quickly destroy profits in
times like these.
MONITOR CUSTOMER-LEVEL profitability
Companies should use transaction-level data to measure precisely the profitability
of each customer. By doing so, companies can detect if the cost to serve particular
customers or declining order volumes are nudging those customers below target
profitability levels. In this downturn, for example, many customer groups are
becoming simultaneously smaller and more costly to serve. One industrial company
found that more than 20 percent of its customers had fallen below breakeven
profitability, forcing it to raise prices selectively and, where possible, lowercost-to-serve by decreasing delivery frequency, reducing sales support, or fulfilling
orders through alternate channels.
Adjust to changing customer needs
Downturns always prompt changes in customer needs and in the benefits they value
when choosing a supplier. The dynamics of the current downturn mean that such
swings can occur even more rapidly. In this environment, the best companies are
constantly assessing—through market research and direct contact—how
economics are changing for their customers. Even more important, they are reacting
quickly by retooling their price and benefit offerings accordingly. For example, one
plastic resins supplier that had developed a fast-curing resin (to enhance capacity of
injection molders when the economy was strong) has now developed a less costly
resin that doesn’t cure as quickly. The new resin helps the supplier’s customers
decrease costs, because molders are not running at full capacity during the
downturn. With other supplies raising their prices, many molders see the
slow-curing resin as an attractive alternative. As a result, the supplier can maintain its
profit margins even while selling the alternative resin at a lower price. The
combination of lower demand and higher input costs in the current downturn
makes it critical to get these kinds of adjustments to the cost/benefit balance correct.
Update price sensitivity research
Dramatic increases in energy and food prices have made consumers much more
sensitive to prices across a wide range of product categories. Each price increase for
necessities such as food and fuel has cut a little more from discretionary budgets,
sharply increasing price sensitivity. Market price tests become obsolete after just a
few months. To get price points right, pricing sensitivity research and market price
tests should be rerun immediately to track these changes.
Monitor your industry’s microeconomics
Radical shifts in costs and demand have thrown previously predictable market
pricing mechanisms into chaos. Responding correctly requires a keen
understanding of the microeconomic forces at play at the industry level. In one
example, a building materials company found itself in a precarious position as the
downturn deepened: a precipitous decline in US housing starts meant diminishing
demand, while the costs for raw materials, energy, and transportation were
increasing rapidly. In response, the company reassessed the industry’s
microeconomics, looking in particular at the latest supply, demand, and cost
dynamics. With this new information, managers cut capacity at a plant in an area
where the decreased supply would not cause a local shortage. The capacity
reduction, which would have had little if any effect on market prices a year earlier,
brought about a better balance between supply and demand and kept market prices
an estimated 10 percent higher than they would have been without the change.
Study your suppliers
The extreme volatility in this downturn demands that companies reexamine not
only the microeconomics of their own industries but also the microeconomics of
their suppliers’ industries. Recently, a specialty chemicals company invested in
modeling the current industry supply, demand, and cost dynamics for one of its
primary raw materials. By doing so, the company predicted an industry-wide, 15
percent price increase for that raw material three months before it happened—a feat
of some significance because there hadn’t been an annual price increase of more than
5 percent for that material within the past six years. Suspecting an imminent and
unusually large price increase, the chemicals company began adding clauses covering
raw-material price increases to its customer contracts, a move that would have met
extreme resistance if made after the price increases were announced. Instead, the
move established an industry precedent for passing cost increases through to
customers.
Cheri N. Eyink, Michael V. Marn, and Stephen C. Moss - Article on Pricing in A Downturn. Courtesy HBR, Sep 2008