12 main pricing challenges you might face
When the market becomes more dynamic, pricing is ever so crucial for weathering the volatility. In this blog, we summarise 12 big challenges and big pain-inducing pricing issues you may also have encountered, as we walk you through the best ways to manage these challenges and come on top.
1. Choosing the right pricing strategy
A price optimisation project involves a significant effort for any business, with multiple internal stakeholders and potential impacts on various systems and processes, such as product management, cost and profit allocation, and customer relationships. If executed successfully, it can bring significant profit. However, if done incorrectly, it can also have negative consequences. To assist in determining the best approach, we have outlined different strategies based on the product's life cycle.
Below you can find an overview of the pros and cons of the different pricing strategies. In reality, the pricing strategy for a company with an extensive assortment will almost always be a combination of methods, and will rarely ever be just one. In essence, the methods refer to the various driving forces of the price. If you want to know how you can implement a pricing strategy in SYMSON, you can read our “How it works” page.
2. When should I increase prices?
After you’ve decided the pricing strategy, there’s still room to improve your pricing. Executives want to avoid a race to the bottom; the self-defeating exercise of trying to beat every competitor’s price on every item. Each pricing decision can require a trade-off between margin and customer loyalty (or price perception). To avoid the race to the bottom, savvy companies identify leading products or Key Value Items which are the products (and their related prices) that customers tend to remember. If a company can do this accurately, it can price those specific products competitively while charging relatively higher prices (and earning more margin) on other products.
One of the most important factors is to detect the price elasticity of each product and customer group to determine which products are leading and which products and which products can be experimented with to increase prices.
3. How much are customers willing to pay?
Testing the price acceptability of a product or service in comparison to the competition is the main principle of any pricing project. This aspect needs to be carefully considered because the rules differ considerably according to whether the product is a commodity or customised. Speculation about a shortage of the commodity may have a dramatic effect on price.
A customer can also attribute value to after-sales services such as reliable/speedy delivery, quality, longevity as well as the brand. A strong brand gives the buyer confidence and enables companies to command a premium price even if the products are similar to the competition.
The link between prices charged and volumes sold is easy to understand; the difficulty arises when the question is asked: ‘with an X% price increase, how much will it affect our sales?’ A price increase may result in a sales decrease, as customers opt for a substitute product or a halt to buying your product altogether. On the flip side, your company may be missing the chance to gain additional profit through charging more – it is all down to customers’ value perceptions and what they will pay. In order to make these decisions, it is crucial to get insights into price elasticity.
4. How to price different between channels?
Varying prices can be important as value propositions may differ with every channel. Via the webshop, customers can opt for more convenience and offline for advice about the products. In B2B, your regular customers may also be rewarded with a higher discount percentage than new customers. It is therefore important to analyse which customers choose which channel and why to include this as an additional “driver” in a price optimisation model. In SYMSON you can easily switch per channel to determine the optimal price.
5. How to commit all people to work more data-driven?
To meet the ultimate goal of margin expansion and optimisation, every action relevant to this must have a data-driven approach. Or else, it would be an ending loop of guesswork and assumptions that would either leave money on the table or the number of sales behind.
However, a data-driven pricing approach makes everything seamless through accuracy. With the boom in online purchases, product prices need to be sensible considering the competition in the market. A ready-to-adapt pricing model with the power to take informed action quickly leaves a significantly positive impact on profit margins.
Dynamic-pricing skills are fundamental to staying ahead of the competition. But in our experience, tools and algorithms are not enough to capture and sustain significant impact. Companies need to put equal focus on people and processes.
In order to involve people in pricing, it is good to find out what their pains and gains can be to make them ambassadors of data-driven pricing.
6. How to deal with bad data quality?
Data quality poses a significant challenge in modern price optimisation. Business data requires thorough cleansing and preparation to be used as input to any Analytics or Business Intelligence system. Other sources of noise are crucial to know - combining product groups with different price elasticities, neglecting seasonality or special events where demands are high and the offerings limited - just to name a few. Managers do not often have prior knowledge or skills to differentiate between bad and good data, but now they are suddenly equipped with AI tools for extracting competitive and actionable intelligence from piles of complex data.
In SYMSON we give every data optimisation a data quality score. With low data quality, we advise on the possibilities to improve the data quality, for example by increasing the number of units sold for this item by varying more with the price.
7. How to execute good experiments?
Since every business — and, by extension, its customer base — has its own set of needs, it may take some trial and error for your company to discover a pricing strategy that perfectly fits with your business model. Even then, the need to innovate and continue building towards a brighter future for your business never truly dissipates. In the graphic below we’ve made a framework on how to set up experiments to understand your customer behaviour and test your assumptions.
- Set goals e.g. “increase gross margin”.
- Ask a question (hypotheses) e.g. “Can we differ price among different stores/ locations? Can we set higher prices at stores with a lower competition and more attractive prices at stores with a higher competition?”
- Prioritise and scope: try to start with a few stores for a certain period (for example one month). Make clear that you compare situations with only one parameter different and the others equal (A/B testing). When there are many important parameters, use special testing protocols such as DOE (design of experiments). Conjoint Analysis is an example of such an experimental setup.
- Test the differences in gross margin between the different stores/ locations.
- Continuously analyse the results. Do we see patterns in all products or a selection of products? If we know that, we can start smarter experiments in the future.
8. How to visualize important price information?
Data visualisations make big and small data easier for the human brain to understand, and visualisation also makes it easier to detect patterns, trends, and outliers in groups of data. Good data visualisations should place meaning into complicated datasets so that their message is clear and concise.
When implementing SYMSON we ask companies which KPIs they want to control and manage in the pricing process (such as margin, sales etc) to visualise this in the dashboard. In addition, we map important patterns of leading products to quickly detect which products are leading in customer behaviour.
9. How do I deal with cost volatility?
Cost volatility is the fluctuations in the prices of raw materials, labour, and other inputs that companies use to produce their products/services. These fluctuations can have a significant impact on a company's pricing strategy, as they can impact the cost of production and ultimately the price at which a product or service is sold.
Cost volatility affects profit margins and therefore pricing strategies, if not optimised. If costs increase, the profit margin suffers; whereas if costs decrease, the profit margin increases, keeping everything else constant.
Moreover, cost volatility can also affect pricing strategies through its impact on competition. The overall rise of company costs in the market for a long period of time can potentially lead to the fall of competitors. Due to low profitability, companies may back out, downsize and shut down. Naturally, this can empower the remaining companies to have stronger pricing power. Similarly, the decrease in costs can make the market crowded with new similar businesses. Depending upon the products/services sold, pricing competition may get tough and a price drop may be vital.
Hence, companies must adapt their pricing strategies accordingly to maintain profitability and stay competitive in the market. While of course, this can include strategies to mitigate the impact of cost volatility, such as investing in more efficient production processes; actively analysing market trends, competitor prices and customer demand need precise attention for comprehensive price optimisation.
To maintain this process, you can opt for an AI pricing software that not only helps compute data in no time and helps optimise prices considering all such crucial factors, but also allows you to apply your own business rules.
10. How do I keep track of inflation to change my prices?
Global inflation keeps fluctuating, so it’s crucial for businesses to be agile and adaptable. Factors like demand-pull and cost-push can cause inflation in an economy and companies must brace themselves. Inflation can impact the cost of production and the price setting of products and services. Moreover, this can lead to low or non-existent profit margins. Hence, prices across the company’s product portfolio need adjustment along with the inflation rate. So, the common question becomes how to adjust for inflation.
During inflation, companies struggle in managing product portfolios and finding the right time to increase prices. Also, understanding price elasticity becomes more crucial than ever but the time pressure may tighten the knot further. To combat this issue, an automated AI pricing tool can ease it all even during inflationary times. Through their pricing algorithm, platforms like SYMSON help provide smart insights to find an inflation-adjusted price and other powerful pricing decisions in any scenario.
11. How can price coordination help set optimal prices across countries?
Prices charged across different countries for products are called price coordination. For enterprise-level businesses, understanding the international markets is crucial. Depending on the laws of economics, prices should vary across regions to maintain proper revenue through a favourable number of sales and therefore profits.
Therefore, when coordinating prices, pricing managers must consider factors like government regulations, market integration, consumer behaviour of that region and more. However, these may be tedious and extremely time-consuming and AI pricing platforms help with such nitty-gritty in an efficient and accurate manner.
12. Transfer pricing problems?
One of the pricing issues in international marketing is transfer pricing. It reflects the way the company manages sales transactions involving the trade of finished products, raw materials, or other services. However, the main factors influencing transfer pricing are tax regimes, local market conditions, market imperfections, and joint venture partners. When expanding your business abroad, you may choose either market-based transfer pricing or nonmarket-based one.
While transfer pricing helps reduce duty costs and corporate taxes in high-tax countries through overpricing goods, there are some risks as well. One of the problems of transfer pricing is additional costs like manpower and time add up thereby making it an inefficient process altogether. This is where AI pricing helps combat such delays and inefficiencies by suggesting optimal prices while considering the tax regimes and market conditions of other regions or countries.
We hope this summary shed some light on some of the more prominent pain points of pricing. At one point or another, your business will have to face such struggles, so being prepared is of utmost importance for ensuring your business' growth stays on track. You can also head over to SYMSON and have a look at the various solutions we provide to help you reach and maintain optimal profit margins. To assist you in this, we regularly share valuable information so be sure to check out our blog page.
Do you want a free demo to try how SYMSON can help your business with margin improvement or pricing management? Do you want to learn more? Schedule a call with a consultant and book a 20 minute brainstorm session!