Companies all over the world optimize everything they can to make more sales. But it’s easy to lose sight of a simple fact. For buyers, their decision comes down to one thing: pricing.
60% of online shoppers, for example, rate pricing as their first priority. Therefore, price optimization is important for any business. So what is price optimization?
Price optimization is the art (and science) of a strategic approach to your product’s price tag. It factors in all sorts of variables—from customer lifetime value to profit margin—to continually hone in on the right price. And it might be one of the most important things you can do in eCommerce. Successfully implementing price optimization creates growth opportunities, customer satisfaction, increased sales, and increased profits.
What is Price Optimization, and How Does It Work?
Price optimization sounds simple enough: adjust the price of a product to maximize profits. You can differentiate ideal pricing based on customer segments, products, and more. Price optimization requires understanding and research on your customers, industry, and business.
Can you optimize the price manually? Yes, but it gets complicated in a hurry. What if one price makes more sales now, but turns future customers away? What if you forgot profit on one item to boost the average order value of every customer’s trip to the store? Trying to manually achieve price optimization for your business will be difficult and time consuming due to research and lack of data to consider. Using an eCommerce platform that provides you with weekly reports can help alleviate the stress of price optimization.
To get some clarity, consider price optimization in the context of your goals:
- Promotional price optimization, or pricing for short-term campaigns, is great for spicing up sales with repeat-buy products and bundles.
- Average order value optimization can be an effective approach for online shops seeking profit growth with consistent margins.
- Markdowns are especially effective for seasonal products and services, such as travel and retailers who cater to unique specialties.
Your goals will affect the way you pursue price optimization. That’s why it’s important to seek out a B2B eCommerce solution that allows you to customize your pricing for specific buyers. This makes it easy to utilize price optimization within your business.
Why Bother with Price Optimization if You’ve Already Found a Good Level?
Let’s imagine that you have a product that already has robust sales. Customers rarely complain about the price, yet your margins are healthy. Why bother with price optimization if you’re in an “if it ain’t broke, don’t fix it” situation?
The reason is that price optimization can help you find blind spots. And learning them could help you make more sales.
For starters, price optimization gives you an edge over your competition. The numbers suggest businesses only spend about ten hours per year—about a minute and a half per day—optimizing their prices.
Given that we know 60% of online buyers prioritize price above all else, the buying decision often comes down to who’s done a better job of utilizing price optimization.
But there’s more than that. For example, doing “best-guess” discounts for pricing can lead to adverse consequences, like missing out on profits. A poorly-placed discount can even reduce the value of your product in the customers’ eyes. Price optimization gives you a strategy for factoring in lifetime customer value when creating discounts.
The result of price optimization: rather than taking on a best-guess strategy for future pricing, you’ll start making more informed decisions. What you learn along the way will affect every decision as you consider short-term product campaigns, discounts, holiday/seasonal campaigns, and more. For this reason, starting price optimization sooner rather than later could place you in favor over competitors. Lastly, price optimization can provide your business with a useful strategic pricing strategy.
An Example of Price Optimization in Action
To help illustrate what’s going on with price optimization, let’s consider an example. In a traditional sales environment, salespeople may have the authorization to slash prices or offer discounts. They do so at their own discretion. The problem? If enough salespeople slash prices, it will affect the bottom line.
A company using price optimization will do some calculating first. Given their margins and the current demand for their product, what could they reasonably expect to charge? What will customers be willing to pay? With a B2B platform in place, a company could theoretically calculate a “floor” under which salespeople aren’t allowed to slash. Using this strategy keeps everyone in your business informed of pricing.
If an online shop selling refrigerator magnets knew that it had to sell each at least 90 cents apiece to make a profit, price optimization might step in and prevent a discount that theoretically lands some customers in the 89-cent territory. But that gets us to our next question: how do you set it up so that your company has as much confidence in its pricing?
How to Optimize Your Pricing
The first thing you’ll need to do to get started with price optimization is get set up on a B2B platform. Make sure that you include key factors related to optimizing all aspects of your strategy, including:
- Flexible Pricing
- Online ordering
- Custom linesheets
Flexible pricing is the key point here. Whoever said it was a rule that one customer had to see the same price as another? Price optimization is not just for individual customers but also B2B.
A B2B platform will let you enable customer-specific pricing that optimizes for different groups. If you have a long-time customer and you want to reward their loyalty, setting a customized price for their continued business can help boost that loyalty. Why switch sellers if they’re getting a better price from you?
How does price optimization work in B2B? The platform you use should make it so that the pricing you offer to specific customers is pricing only they can see.
You’ll also want to choose your overall approach. Are you in seasonal retail, when you have to be precise and calculated with your campaign markdowns? Or are you in an industry with long, consistent, loyal customers, where it might be worth creating a low entry price? A B2B platform can help keep you informed. But even more than that, it can give you the option of creating entirely different prices for each group of customers. Therefore, a B2B platform gives you control over your pricing with less hassle of manually creating groups. So what is considered when you start price optimization?
Making Price Optimization Work
Good price optimization may factor in all sorts of variables, including
- Customer churn (when the prices get too high)
- Lower perceived value (when the prices get too low)
- Average order value
- Average customer lifetime value
There is no one way to optimize prices. It’s a bit like a Bonsai tree: never truly finished. Organic and constantly growing, your price will never truly find its optimal number. However, using a B2B platform will help you make informed decisions on pricing and provide the data you need to continue creating and improving your pricing strategy.
If you invest in an effective B2B platform, you can completely overhaul the way you look at price optimization and give yourself a leg up over competitors who barely spend much time thinking about pricing at all.