Price Optimisation | Targeting the Profit Efficient Frontier
Price Optimisation is comprised of two distinct but complementary activities:
1 Price Architecture Optimisation. Here the over-arching pricing strategy, business rules, price lists and architectures, charging structures, and price metrics are explored and optimised. The objective is to align the pricing architecture with the goals of the organisation, to build competitive advantage, and to maximise value capture; and
2 Price Point Optimisation. Here mathematical models of demand and price-response are estimated and calibrated. These models are utilised to identify the specific prices that will maximise organisational objectives. These objectives are typically set as profit, revenue, market share, capacity utilisation; or a combination of these.
Price Optimisation is not Price Setting. Price Optimisation methodically and scientifically pushes the envelope in terms of what is possible and achievable in revenues and profits.
Price Setting, on the other hand, typically follows industry norms and legacy pricing rules, matrices, structures and practices without explicitly posing the question “Do our prices and architecture deliver the right price to the right customer at the right time every time while simultaneously maximising our profits and revenues?”.
Price Optimisation directly addresses this question and delivers a mathematically verified, customer-centric, and profit maximising pricing architecture.
Price Setting typically makes marginal improvements in price realisation; Price Optimisation seeks to re-imagine the profit opportunity.
Price Optimisation | Industry and Market Applicability
With few exceptions, the fundamental concepts and enablers of Price Optimisation apply across industries and market structures. Inovyse has undertaken Price Optimisation projects in B2B and B2C; and in industries as varied and diverse as mining commodities, medical devices, retail, hotel and restaurant, professional services, equipment rental, publishing, and banking.
The primary differences between industries and market structures revolve around how variations in price elasticity and willingness-to-pay evolve, and how customers perceive and derive value.
Price Optimisation | Maximising Value Capture
Price Optimisation efficiently drives revenues and profits as it methodically exploits two variations latent in all markets (a) variations in price elasticity and (b) variations in margins.
These variations can be mapped, quantified, and leveraged at increasing levels of granularity; from industry to market to segment and ultimately down to individual.
These same variations enable the opportunity of deploying radically different pricing architectures and price points to capture a greater proportion of the profit pool within an industry, market, or segment.
Price Optimisation | Crawl-Walk-Run
For many organisations Price Optimisation is a significant departure from business-as-usual Price Setting. As such, our approach is to initially price-optimise a small sub-set of the total product/service portfolio of an organisation.
This allows the organisation time to embed understanding and trust in the process, analysis, optimisation algorithms, and tools of Price Optimisation.
To explore how our Price Optimisation methodologies can efficiently drive your organisation’s revenues and profits please contact us. Or learn more about how Price Optimisation propels Pricing Strategy.