What is a pricing business rule?
A pricing business rule is a constraint that reflects prior information of the user and can be integrated into the price optimization. The rules are applied to improve the pricing solution and find a better one than would be offered without these constraints.
We can explain the added value of a business rule with an example:
A pricing manager receives the price optimization that has been calculated with the driver price elasticity. This price is optimized for revenue which means that revenues of this individual product will be maximized. The pricing manager remarks that this solution doesn’t look right; optimal prices shouldn’t be more than 5% lower than the previous price and should have a minimum gross margin of about 25%.
There are two possibilities to come to a realistic price:
- The pricing manager uses his (prior) information about optimization is manually trying to combine this with the outcomes of the algorithm.
- The system integrates the specific business rules to let the solution correct the optimal prices.
Examples of business rules are:
- Allowed number and frequency of price changes
- Min-max discount levels or maximum lifetime discount
- Types of discounts allowed (e.g. 10%, 20% etc.)
- The “family” of items that must be marked down together
At the end of the day companies want to be able to achieve the full value of optimization while still complying with whatever business rules are defined by their strategy. The challenge is in striking the right balance between the two.
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