Pricing Optimization

Pricing is one variable in a complex set of variables that make up a brand’s overall strategy. These variables include product features and quality levels, pace of innovation, speed of delivery, strategic positioning, advertising messaging, advertising spending levels, package design, and distribution channels. The central question is: what combination of variables enables a brand to consistently maximize its pricing vis-à-vis the pricing of competitive products and services? That is, how does a brand maximize its pricing relative to competitive brands’ pricing?

Pricing Strategies

Some common pricing strategies:

1. Maximize?product or product line revenue, profit, or market share. This is the most common pricing strategy—setting prices in such a way as to maximize product line revenue or profit. In some cases, market share may be maximized, particularly in the early stages of new product introductions as trial rates are stimulated.
2. Optimize product-line pricing based on?customer’s perceived value. Differentiate a product line so that prices are higher for products which have features and benefits that are most highly valued by customers and prices are lower for products that have features less highly valued by customers.
3. Customize price based on?customer segment. The idea is to charge more for those customers who are willing to pay more. This is a price-discrimination strategy, which may be effective in some markets but should be approached with caution since there must be a good reason to charge different customers different prices for the same product. For example, if it costs more to deliver to certain buyers, or competition is stronger among certain demographics, then price discrimination may be justified.
4. Customize price based on?purchase channel. For example, consumers might find lower prices on organic food products at Walmart, compared to potentially higher prices on the same products at a specialty organic grocery chain.
5. Optimize the price for a?new product. Optimizing the price for a new product is often a difficult task, as consumers and suppliers might not have any benchmarks. In this case, special analytical pricing methods are required.

Pricing Analytics Methods

Decision Analyst uses an array of research techniques and analytic methods to optimize pricing. The exact method chosen depends on a brand’s goals, budget, and timing.

• Hierarchical Bayes Choice Modeling
• Joint Stated-Revealed Preference (JSRP) Modeling
• Artificial Intelligence and Machine-Learning Models
• Sales Analysis and Modeling
• Strategic Positioning Studies
• Advertising Spending-Level Tests
• Competitive Benchmarking Tests
• Strategic Tracking Surveys
• Product Testing and Optimization
• Advertising Copy and Campaign Testing
• Stated Pricing Techniques, such as Gabor-Granger
• Geoanalytics and GIS Analyses

Pricing Strategy Abhors a Vacuum

Regardless of the pricing strategy adopted and the research methods used along the way, companies must always consider the competition and other marketing variables (positioning, advertising claims and media spending levels, etc.) when setting prices. Evaluating potential pricing strategies with future-looking methods is critical because missteps alienate customers and damage margins. Successful implementation depends on how well the pricing strategy matches the overall corporate strategy. Companies must first decide who and what they want to be and then use pricing to support this overall vision.

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