Learn what price optimization is, how price elasticity is calculated, how dynamic pricing works, and why price optimization is critical for maximizing profit.
Price Optimization: A Guide to Maximizing Profit
Defining how price optimization software works, how price elasticity is calculated in B2B, data science techniques, and why price optimization solutions are superior to a rules-based approach in delivering meaningful P&L impacts for complex B2B businesses.
What is Price Optimization?
Pricing optimization is a process that utilizes artificial intelligence to measure price elasticity and predict the outcomes of various pricing strategies to generate pricing that wins the business without sacrificing necessary margin.
Modern business moves at lightning speed through many sales channels. The corresponding data that gets captured grows at an exponential pace, creating ever-increasing complexity as new market triggers force companies to adapt. These dynamic factors – including order history, customer behavior, competitive concerns, available inventory, demand swings and geographical market specifics, to name a few – each uniquely influencing price from one selling scenario to the next.
Without the right price at hand for each unique circumstance, an unintended consequence of trying to manage pricing complexity manually with spreadsheets or homegrown tools, companies are exposed to serious margin leakage.
Analysts commonly use spreadsheets and other manual tools to set and manage prices. If your business only has a handful of products and customers, this tends to work well. What about companies with tens of thousands of SKUs and thousands of customers? A massively complex business environment is the new reality for most B2B companies.
Price optimization software that uses artificial intelligence and machine learning techniques can capitalize on this inherent complexity that companies are operating within to achieve P&L objectives. Price optimization has been developed for both B2B and B2C use cases; IDC draws a distinction between the two groups as follows:
- B2B-focused price optimization applications, which are typically focused on pricing products that are sold by a salesperson but are increasingly being sold via B2B eCommerce and direct to consumer via B2C and B2B2C.
- Retail-focused B2C price optimization applications, which are customized for pricing retail merchandise across channels and life-cycle pricing capabilities to price merchandise as it moves through the various stages of retail life: regular, introduction, promotion, markdown, and clearance pricing.
As the leader in B2B price optimization software, we will focus on the former in this explainer.
What is the Role of Price Optimization in B2B?
Price optimization allows B2B companies to set prices that make sense for each unique selling circumstance - which can be an amazingly challenging endeavor without leveraging this practical approach to data science.
The many ways a company prices — list, matrices or tiers, customer-specific agreements, spot negotiations and overrides, all of which are interconnected — drive complexity. Distributed pricing decisions, large customer and product counts, and complex product configurations
further complicate the pricing process. It can become unmanageable to account for all of the factors that influence price, including cost changes, competitive dynamics, product velocity, customer relationships and types, geographies, and order circumstances.
It’s no wonder the go-to method of complicated spreadsheets or generic manual tools no longer suffice in setting the nuanced pricing that’s critical to meet P&L targets. A more sophisticated approach is necessary.
Why is Price Optimization Important?
Price optimization simultaneously accounts for all the factors that drive price, rationally aligns price/customer/order/product relationships simultaneously, and statistically measures what drives price response in the market, all while enforcing necessary guardrails and producing price guidance for all the different ways price is expressed in a B2B business.