B2C Price Optimization Best Practices
- Pricing optimization finds the highest sale amount a consumer segment will pay for a product or service. It models the price factors that impact quantity sold and statistically measures how consumers respond to price changes. It compares alternative pricing scenarios, identifies the optimal pricing and forecasts how changes to item sale amounts impact revenue and profit.
- B2C price optimization is characterized by selling high volume, low margin goods to consumers over multiple channels. Because consumers believe items are largely undifferentiated, seek out cost or value advantage, and readily switch brands, consumer pricing strategies should be tightly integrated to the brand and customer loyalty strategy.
- Systemic and continuous revenue growth can be achieved with price strategy and optimization. Research shows this process increases annual revenues by 2 to 4 percent and grows profits 4 to 9 percent.
B2C price optimization is a powerful but underutilized revenue growth lever for most companies. Lets face it, identifying optimal item sale amounts is a specialized skill so many companies default to pricing based on their competitors or anecdotal experience.
However, that misses a significant and sustained revenue and profit growth opportunity.
Even small changes to average price deliver a linear impact to profits. Several years ago Harvard Business Review published a study which found "a 1 percent increase in price resulted in an average profit increase of 11.1 percent." While that study is dated, the math hasn't changed.
Research published in The Sales Excellence Report shows that B2C companies that implement strategic pricing with optimization achieve greater agility, more value from their goods and services and higher customer affinity for the most competitive goods. They also achieve top line revenue growth of 2 to 4 percent annually, on average, and bottom-line profit growth of 4 to 9 percent, on average.
Why B2C Price Optimization is Different
Here's how consumer-based selling and pricing optimization are different than business to business selling.
- Consumer-based sale amount calculations are for retail merchandise sold to consumers directly or indirectly and through physical and digital channels.
- B2C sales are often impulse purchases. They are made without significant vetting and are won or lost in the consumers moment of truth.
- B2C selling consists of higher volumes of lower margin sales.
- Consumer prices change more frequently and pursuant to the product or customer life cycle. For example, product sale amounts changes from launch to promotion to markdown to clearance.
- As opposed to individual sale negotiated discounts, price reductions are provided with bulk purchases, promotions or loyalty program benefits.
B2C Price Optimization
The four cornerstones that will most influence consumer price optimization success are product-centric strategy, demand elasticity, item value segmentation and technology automation.
The best consumer strategies apply different price goals to different products. For example, capture products that bring consumers into the stores or buyers to the website may be set with a cost-plus minimal markup and deliver the lowest margins.
Attach products that compliment or are bundled with capture products will deliver much higher margins because optimization algorithms can calculate the consumers' price sensitivity and willingness to buy at different sale amounts.
The single greatest intelligence to yield the most value from products and services is your price and demand elasticity calculations. Determining elasticity measures for high volumes of products takes discipline, but when you have the information you are empowered to optimize item sale amounts in ways that systemically and predictably grow market share, revenues and profits.
The third cornerstone of successful optimization is to combine price elasticity measures with key value categories (KVCs) and key value items (KVIs), possibly with consumer personas, to create precision pricing. The KVCs and KVIs are a small group of value items that attract value-driven shoppers.
For most B2C sellers, less than five percent of their products will drive the brand's value perception, source over half of the consumer traffic and pull through attach products that deliver more than two-thirds of the margins.
The top mistake brands make is segmenting KVIs or KVCs at a macro level, such as for the company or an overly broad geography. Instead, these items should be determined at a micro level, that is at the individual store or website and by shopper persona or product basket. Accuracy increases as you get closer to the sale transaction.
Another mistake is not updating KVIs and KVCs frequently enough. Fortunately, pricing software can automate this process and thereby create dynamic or real-time pricing.
Technology brings automation to each of the prior activities. As illustrated in the below diagram, it harvests the source data into a data model. It then applies conditional rules or more likely artificial intelligence (AI) algorithms to item segments (KVIs, KVCs, assortments or similar segments) and elasticity measures. It then delivers the optimal sale amounts for goods and services.
The technology may also do things like A/B price tests and deliver personalized pricing for anonymous shoppers (via digital footprints, online behaviors and sentiment) or known consumers (via CRM profiles, a 360 degree customer view and loyalty program participation). It can adjust item sale amounts based on inventory availability or scrape competitor or third party websites to monitor competitor prices and adjust KVI prices in real time. Pricing technology is sophisticated and the possibilities are many.
The bottom line is that while consumer price optimization is a sophisticated process that requires dedicated effort it is also proven to increase market share, revenue and profit.