In a world that is currently driven by big data, the set-it-and-forget-it pricing models used by many businesses are proving to be insufficient. To optimize organizational performance—and compete with industry giants like Amazon—businesses must be willing to adopt a dynamic pricing model.
Changing your pricing model is often the most efficient way to improve your business’ bottom line. According to the Wharton School of Business of Pennsylvania, a 1% improvement in sales volume will usually increase profit by 3.6%, and a 1% improvement in cost will increase profit by 8.7%. But a 1% improvement in price can increase profit by 12.3%—as much as the other two figures combined.
Keeping this in mind, what are some of the things your business can do to immediately improve its pricing model?
1. Update Prices More Often
As suggested, one of the most inefficient things a manager can do is assume their pricing model is built to last. In years past, managers might consider revamping their pricing on a quarterly or even yearly basis. But these timeframes are simply too wide, especially in a world with increasingly volatile supply chains. Fortunately, new technologies make it easy to implement a pricing model that is constantly evolving.
2. Collect More Data
Data is value. The more information your enterprise is able to collect, the more dynamic and adjusted your pricing model will be. How does a 1% change in price affect your sales volume? Does a 1% decrease have a similar effect? Ultimately, you won’t be able to answer these questions, or any others like them, unless you are actively collecting sales data and monitoring how changes in one metric might influence the others.
3. Discounts Can Increase Revenue
No matter what kind of business you currently operate, the value of your products is not the same from one client to another, though your costs may be the same to produce. Why should these clients pay the same price? If your product delivers more value to a customer, don’t you deserve to be compensated for that? The answer is yes, you do. The problem is that discounting is typically the tool that is used to differentiate pricing for different customers and customer segments. When pricing is more dynamic, discount policies can be used to increase sales while protecting profit, in lieu of haphazardly to close deals, making discounting a more strategic lever for the business.
4. Increase Competitor Research
Everything your business does will be done relative to your competitors. Changes in your direct competitors’—and even indirect competitors’—prices will ultimately be reflected in your business’ own sales volumes. A dynamic pricing model will not only account for data being generated from your own business and customers but from external enterprises as well.
5. Utilize a Dynamic Pricing Platform
The path to better pricing is clear: Update your prices more often, use wider data sets and be willing to adapt to ongoing changes in your industry. Although this path forward might be apparent to many, it is also unlikely that they are currently equipped to handle their pricing strategy entirely on their own.
Luckily, there are a lot of great pricing platforms available for these managers to choose from. Platforms like PROPHET help make it easy to enhance and automate the pricing process and utilize modern data science to their advantage. By making just a small improvement to your current pricing model, your business can significantly improve its bottom line.