Saturday, April 28, 2007

Buyer Beware -- Price Optimization

Price optimization software now making it possible to price product based on customers behavior, sales history, competitors' price, product mix and the fact that people are hard-wired to love sales - when we see good deal (mark down), a different part of the brain lights up than with a loss (price rise)

Read more about it in this AP article - Software helps some stores decide when the price is right

Some results of price-optimization software:
Like many national companies, one electronics retailer priced batteries the same all over — until SAP's Khimetrics software showed that consumers in Dallas were generally willing to pay more for batteries than people in Boston. The data revealed another twist: The battery that had the highest "price sensitivity" in Dallas had the lowest price sensitivity in Boston. In other words, while Texans would buy this particular battery only within a narrow price range, Bostonians were far less picky. The store altered its prices accordingly, sold more batteries and made more money.

A grocer charged high prices for ice cream but frequently offered deep discounts. Consumers largely bought ice cream only during the promotions. Khimetrics advised reducing the regular price of ice cream and running fewer sales. Eventually revenue and profits rose.

At a store that offered an array of paintbrushes, the best-seller was its cheapest one, at $1. DemandTec suggested the store stop selling the item. The software showed that doing so would help the store sell more higher-priced (and more profitable) paintbrushes because the key factor in paintbrush sales was whether a customer was buying paint, not the price of a brush.

How was pricing done in the past or still done?
According to survey conducted at the Pricing Institute’s 18th Annual PriceX Conference held in Chicago, Illinois in June, found that:
  1. 61 percent of companies use a spreadsheet to determine price not a specialized pricing application or vendor
  2. 56 percent of companies have some sort of pricing strategy in place
  3. 44 percent of companies have a dedicated pricing person or department responsible for pricing
  4. 35 percent of companies consider pricing a top priority.

Reuters reports another survey, this one of members of the National Association for Business Economics (NABE), found that 38 percent of respondents reported higher prices during the second quarter. Additionally, 43 percent of respondents anticipated raising prices during the next three months.

Companies that have price optimization products (click on the image):

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