PricingBrew

Insights & Tips

Already a subscriber? Login

Become a subscriber and unlock an information arsenal focused on making your pricing efforts more effective.

The Real Meaning of Price Optimization

The term “optimization” is widely used in the pricing field to describe applications that set prices. With so much use, the definition of what optimal truly means has become nearly as convoluted and murky as the term “Big Data.”

Put simply: Optimization is a decision-making process that employs data, algorithms and software to make recommendations better and faster than humans. By examining all possible choices, it predicts the outcome of each, and selects the one which maximizes business results. When applied to pricing, it examines all possible price choices, predicts the revenue and profit outcome of each and selects the one that maximizes business objectives.

But, Optimization is not about just using automation to make decisions faster or just using data to make better decisions. The purpose of optimization is to find the set of inputs that lead to the maximum output. In other words, find the prices that are likely to result in the best revenue or margin outcomes for each part of your business. The goal is not just to have different prices, it’s to hit certain revenue and margin targets, using price as a lever.

In order to predict the revenue and margin outcome, you have to know how different customers will react to price changes across various circumstances, which requires knowledge of price elasticity. Price elasticity is the single most-important factor in setting profitable prices while keeping revenue risk to a minimum. If you don’t understand price elasticity for a given customer segment, you risk leaving money on the table or losing profitable sales.

Most B2B companies do not use price elasticity to set prices because they assume they can’t. Instead, these companies rely on backward-looking analytics or statistical distributions of prices. It’s been a long-held belief that price elasticity is impossible to calculate in a B2B selling environment. That’s simply not true. It is possible to measure how market segments respond to price changes and thus optimize outcomes.

The data needed to take a scientific approach to price optimization already exists. It’s readily available transaction data — the customer, product and order data that every company captures in the course of doing business. From that data, you can segment customers into small groups that have similar price response and measure the price elasticity on an ongoing basis for each segment.

Taking a surgical approach to pricing, or actually optimizing prices by measuring price elasticity, will have a dramatic impact on profitability while minimizing risk and improving responsiveness to market dynamics.

Learn more about how price optimization can simplify pricing processes in this free article, How Measuring Price Elasticity Eliminates the Guesswork in B2B Pricing

Get Immediate Access To Everything In The PricingBrew Journal

Related Resources

  • Are Revenue Management and Pricing Different?

    Some practitioners will use the terms "revenue management" and "pricing" interchangeably. In this expert interview, Amit Aggarwal, the Executive Vice President of Revenue Management at iHeartMedia, helps explain the differences and why they matter.

    View This Interview
  • The Essence of Strategic Pricing

    It's easy to fill your to-do list with all sorts of tactical pricing tasks. But if you're only focusing on those, it's hard to generate significant results. View this recorded training seminar and learn about tackling the most powerful and effective aspects of real strategic pricing.

    View This Webinar
  • Combating Competitive Pricing Pressure

    Pricing pressure is just a fact of life. But how well you handle that pressure can determine whether your business ultimately succeeds or fails. This guide exposes 15 ways to address (and prepare for) competitive pricing pressure.

    View This Guide
  • Dismantling Mid-Market Pricing Myths

    In this Expert Interview with Jared Wiesel of Revenue Analytics, learn about his work helping mid-market companies get past the myths and misconceptions to begin leveraging the power of pricing technology.

    View This Interview