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Let’s take a few minutes to look at price optimization and how it helps you balance value for your customers and revenue for your company.
What is price optimization?
Price optimization uses your market research to determine the ideal price point for your product or service that will balance value and profit. It’s the foundation of your pricing strategy and decision-making.
Low prices generally equal better value for the customer, which drives a higher sales volume, but can represent a loss as far as revenue for each sale.
High price points may generate more profit per sale, but sales volumes may drop if customers don’t perceive a high value related to the price.
You can find the sweet spot between value and profit with price optimization. Remember, pricing can affect customer satisfaction, loyalty, and sales.
The following information is critical to optimizing your prices:
- Customer survey data
- Amount customers are willing to pay
- Perceived value for price
- Customer behavior data
- Demographics
- Age
- Gender
- Household income
- Psychographics
- Lifestyle
- Geographical market details
- Segmentation based on location
- Historic sales data
- Response to past price changes
- Operating costs
- Inventories
- Avoid items going out of stock when deeply discounted
- Demand fluctuations
- Competitive pros and cons
- Customer lifetime value
- Churn data
But before you start collecting data, let’s discuss why you should optimize your prices in the first place.
The comprehensive guide to market research
Whether you consider yourself a pro or just getting started in the market research world, you’ll learn something new by reading our quick start guide.
Advantages of price optimization
There are many benefits associated with pricing optimization.
The four main advantages are:
Improve ROI
Return on investment (ROI) improvements should happen quickly with optimized pricing. You can monitor changes easily, and teams can respond rapidly to fluctuations in demand—which allows you to maintain your best ROI.
Maximize sales and profits
Locating your best possible price points allows you to maximize sales and profits because customers are more likely to pick up on optimal pricing and move forward with purchases. Pricing that isn’t optimized can lead to decreased profitability and business failure.
Faster reactivity to market shifts
Using market research solutions from SurveyMonkey helps you keep your fingers on the pulse of the market. By monitoring shifts in the market, you can respond quickly with appropriate pricing changes—all based on data.
Understand customer behavior
The entire price optimization process is about analyzing your data. With this comes a better understanding of your customers. This should guide your business strategy for offering products that you know your customers will buy at prices they are comfortable with.
Take a look at additional resources for pricing strategies:
Why price optimization sometimes fails
While some problematic pricing strategies fail due to poor understanding of the process or data, these other aspects can also cause issues:
- Guesswork: pricing optimization is based on consistent, carefully collected, and analyzed data. If you simply guess, you’re very likely to encounter problems.
- Data errors/inaccuracies: use reliable market research methods and tools to collect and analyze data. SurveyMonkey offers several market research solutions to ensure the success of your pricing strategy.
- Pricing isn’t value-based: value-based pricing is critical to the success of your products’ sales. Customers will be weighing the value against the price you set. If you don’t take value into account, sales will suffer.
- Heavy discounting: while discounts can help increase sales volume, discounting too heavily or quickly can cause problems like running out of inventory. It’s best to do price optimization research and start with the best price point for your target market.
- Misunderstanding tiers: too many or too few options pushes away potential customers.
- Ineffective segmentation: it may be tempting to use a model of segmentation that you’ve already created, but for best results, it’s necessary to create a segment based on willingness to pay.
What you need to optimize for
Each of your products needs to be optimized for starting price, discounted price, and promotional price. This will help you prepare for each stage of your product life cycle:
Starting prices
Your starting prices give your customers the first impression of your product and its value. The price should reflect the product’s baseline demand—without any need for discounts or promotions.
Price optimization works well for the initial pricing of products with a long life cycle
—groceries, office supplies, etc.
Discounted prices
Products with a short life cycle, such as seasonal fashion or décor, hotel rooms, or airline tickets, often are subject to discounted prices.
Discounted prices help your business decrease inventory by tempting customers with low prices. It’s critical to keep the product’s overall profit contribution in mind when deciding the level of the discounts.
Promotional prices
When you temporarily reduce the price of a product to create a psychological sense of urgency and scarcity, it’s called promotional pricing. This usually gives sales a quick boost.
Promotional pricing may include a discounted price for bundling products together, such as “buy one, get one free.”
Common pricing strategies
There are several types of pricing strategies, and you’ll choose one based on your industry or business. Each one has positives and negatives. Once you choose your strategy, you can begin the price optimization process.
These are a few common pricing strategies to get you started:
Penetration pricing
This is an aggressive pricing strategy in which you enter your product into the marketplace at an extremely low price. This strategy aims to disrupt the competition by pulling customers away with lower prices.
An example of this would be Blockbuster and Redbox. When Blockbuster was still renting out DVDs of our favorite movies for around $5, Redbox put its automated rental boxes outside of several stores. The Redbox price was $1 per day for rentals and $1 per day for late fees. Blockbuster is long gone, but Redbox is hanging on—until streaming services bring it to its end.
Competitive pricing
In competitive pricing, you use your competitors’ prices as your benchmark. You then price your products the same, above, or below theirs.
You need to ensure that your production and overhead are low enough that your profits don’t become nonexistent with low prices. Grocery stores often use this type of pricing for their own store-brand products that are competing with brand-name products.
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