The chicken and the egg: using price optimization and pricing analytics to shape demand
Actually, it’s both.
Earlier this month we introduced a game-changing Price Optimization solution that uses predictive pricing analytics to strategically shape demand, which is then used to shape price, and so on.
The result? Distributors and retailers now have the power to dramatically improve the financial results of their demand management efforts. For a boost in gross profits up to 30%.
The Chicken and The Egg Need Each Other
It’s like the ‘chicken and the egg’ scenario. While most businesses are in a reactive state in how they price inventory to meet changing customer demand, next-gen Price Optimization solutions get businesses thinking higher-level about the relationship between demand and price – and how they can get the two working together.
It becomes a question of ‘which came first, demand or price?’ When you can control both, very intentionally, you bring a HUGE value multiplier to the demand management process.
Check out this video to see how new Price Optimization solutions integrated with Supply Chain Planning software achieve this:
Demand Management is a Reactive Sport
According to the 2020 State of Wholesale Supply Chain report, distributors saw sales rise 8% in 2019, yet continue to watch margins erode because of volatility in supply chain. That’s because their strategy for managing uncertainty has been to stockpile inventory, then sell off the excess at cost-plus. Or raise prices on limited inventory levels at the risk of lost sales and profitability.
You simply can’t do that given today’s high price transparency across competitive channels including ecommerce and direct-to-consumer, and against price-transparent companies like Amazon.
Getting that 8% sales increase translated into profits means putting solid pricing analytics behind demand management, including:
- Getting a handle on where you stand with under-/overpriced inventory; not just A-items, but across ALL items by channel, location, etc.
- Analyzing data on customer willingness-to-pay
- Testing the outcome of price changes before you make them
- Being able to measure price elasticity on all items including longtail assortments across varied locations and channels – and aligning the organization on that intelligence to execute decisions
Sounds pretty nifty, right? That’s what price optimization solutions do.
How Do Price Optimization Solutions Work?
We often hear demand management teams say, “I wanted to increase prices, but I was scared of losing sales or losing customers. And so continues the paralyzing “cost plus” approach. It’s safe, but you’ll never grow profits like that.
In order to compete and grow, you need a flexible approach that lets you take risks, confidently. Doing so allows you to proactively shape demand and be more agile and strategic in how you price inventory. And vice versa.
How do Price Optimization solutions work? Price Optimization software applies science to find opportunities you’d otherwise never be able to act on because you had no idea they were there. These systems use predictive analytics and simulation tools to go deep into the dark crevices where financial gain hides, such as:
- Price-type relationships (list vs. wholesale vs. refurbished vs. remanufactured)
- Different cost models – retail, wholesale & custom
- Price groupings – product, family, class, etc.
- Competitive positioning & market condition changes
- Supplier requirements, other minimum & maximum thresholds
- Prioritized rules & psychological price points
Machine learning-based pricing analytics software calculates max-profit point based on price elasticity and associated willingness-to-pay. These profit-driven systems consider seasonality, product attributes, location, sales channel and more.
You can use that data to tailor pricing to each customer and situation, and even measure all the way down to the customer level to guide sales negotiations.
Price Optimization solutions go broader than current guesses and S&OP processes, where companies are selling off items via clearance prices and channels, only to realize later that the items lacked sales because of bad pricing.
Pricing Analytics: The New Profit Driver
The old sales mindset that you have to lower prices and increase deal volume in order to grow revenues is a thing of the past. When predictive pricing analytics are combined with Supply Chain Planning software, the value multiplier is better than any manual method you’ll ever use. Research supports this. According to report by McKinsey & Company,
A 1% drop in inventory cost can improve profits 12%… while a 1% improvement in price can increase profits an additional 18%, for a total of 30% gross profit improvement.
So what do you think? Are you ready to start shaping demand with price and start pricing to shape demand? Want to make demand management decisions based on max-profit point, versus gut instinct?
We’re super excited to show how this works in your business! Check out Blue Ridge’s Price Optimization solution to bring clarity and a strong level of confidence to your decisions.
Request our whitepaper here: “5 Ways Price Optimization is Evolving the Demand Forecast From Guess to Max-Profit Decision”