Navigating the Paradox of Choice – a commercial slant

In today's customer-driven market, the mantra "choice is king" reverberates across industries. Companies vie for customer attention by offering an ever-expanding array of products, features, and options. However, amidst the allure of choice lies a paradox: while variety can be a powerful tool for attracting customers, it also presents significant commercial challenges that must be carefully navigated.

The proliferation of options can strain operational resources and increase complexity within the organization. Successfully managing a diverse product portfolio requires meticulous inventory management, supply chain optimization, and resource allocation. Each additional product variant adds layers of complexity to production processes, distribution channels, and marketing strategies. Consequently, companies may find themselves grappling with higher costs, logistical challenges, and inefficiencies as they strive to meet the demands of a multifaceted product landscape.? If anyone is interested in this topic, then take a look at www.true-profitability.com.

The real and often overlooked challenge comes commercially.? As businesses create modular solutions, with add ons, keeping track of the price and the unintended consequences of layering options is crucial.

Case Study 1 – feature based pricing. A major pump and valve manufacturer was struggling with how to price their valves. They had about 100 valve families, each with 150 configurable features, which created an almost infinite set of potential combinations. Whilst it was difficult to understand the true cost of each configured valve, the approach to pricing was described by the Commercial Director as ‘haphazard’, with 100%+ pricing spreads for what were ostensibly comparable valves. A pricing and margin model was built leveraging data science expertise in order to develop “value and cost clusters” tied to SKU features. By grouping similar value clusters, it became clear where costs were misaligned relative to prices but also where operational inefficiencies were comparably high and existing pricing inconsistencies could be better aligned. Ultimately this enabled a complete reassessment of the portfolio and pricing, building a pricing grid tied to perceived feature value that generated $16m of margin.

As SKUs proliferate then not only are clients confused but also it is harder to track competition. Unless you are in the fortunate position of being effectively a market maker or an oligopoly (think Amazon) keeping an eye on competitor activity and prices is crucial. With simple products and services, there are comparison sites, but other times you need to truly understand your own and your competitors’ offerings and get into the nitty gritty.

Case Study 2 – competitor pricing insight. A large Electronics Distributor, with 500,000 SKUs in stock who wanted to understand where they sat against their competitors. Even among a category like cables there are 20k + unique items, so finding similar competitor products to match is tricky. The only way to do this is to extract as much information as possible from competitor brochures and websites in order to match the client’s products with the nearest equivalent.? The data extraction from 15 competitors was manageable, but the key is to create an approach to match competitor products, often having to find nearest matches using 15-20 product criteria, which naturally differ by each sub-category. The wealth of insights from high quality, high volume, consistent competitor insights has meant that the Distributor has been able to understand compete pricing strategies, yield up ?in certain categories and to understand the premium customers will pay for in stock items and immediate delivery.

However we are increasingly faced by dynamic pricing, where prices can change dramatically.? For commodities that are traded, particularly if they are perishable and have a short shelf life, this is an accepted dynamic market solution. In parts of travel (Airlines, Hotels and Car Hire), dynamic pricing (often known as Revenue Management) has become the norm and is largely accepted by consumers. However when you look into niches in the sector, such as Holiday Parks, Tour Operators and even Cruises, pricing is either very static or reactive to events.

Case Study 3 – demand forecasts. A large holiday resort business, with 30+ sites had decided to become a market leader and be a price setter, with the key strategies of yielding up (early bookers get a better deal than late bookers) supported by more frequent but smaller price changes. With COVID as a backdrop to make historic comparisons harder, the business executed. The commercial teams delivered many more, small price changes, but being reactive in a price sensitive market, meant that their pricing ‘flip-flopped’ with 40+ price changes for a specific site-break with 15 price direction changes.? The provision of sophisticated algorithm driven (un)constrained demand forecasts allowed the commercial team to hold their nerve in the data noise, retain the price changes but reduce price direction changes by 75%: we are still counting the benefits of pricing strategy rather than pricing reactivity!

In conclusion, while offering choice can be a double-edged sword for companies, it also presents an opportunity to differentiate and delight customers in a crowded marketplace. By addressing the commercial pricing challenges associated with choice strategically and proactively, companies can unlock the full potential of variety as a driver of growth, innovation and profitability.