Pricing Strategy in Revenue Optimization – Part 2

This blog is a two-part series on pricing in Revenue Optimization. Part 1 gave you a more introductory look at pricing, covering some surface-level topics. In this blog, part 2, Wâtte will give you a deeper dive into pricing, covering price elasticity, how to set your product’s optimum price and the importance of data.

If you’d like to learn more about why pricing matters, the role it plays in Revenue Optimization, and the right and wrong way to approach setting the optimal price for your product, read part 1 here. 

*We’d like to note that there are several ways to approach Pricing Strategy when it comes to Revenue Optimization. The following Q&A will provide you with valuable information regarding your strategy and Revenue Optimization but keep in mind there are no set numbers, tools, or answers that will magically guarantee a successful pricing strategy.

Q: What are the typical business questions related to pricing? 

A typical business question you see is “What is the best price point for my products in the market?” You can only answer that if you have insights and the elasticity of your product across elasticities. This is the impact you make versus other competitive products in your market. Not every product is a competitor, so you're not always seen as an alternative. For example, if you are a juice company, say in the health juice market and there's someone selling kids juice, you are not in the same league. Your price change will not impact and will not be impacted by the kids juice. They are not related, and there isn’t any interference with each other. It's important to know which products are your competition. Sometimes what you see is that you can cause an increment for the total volume in the store. That's interesting to a retailer. But, unless there's a huge difference between the margins you can make on a product, it might be hard to get on the shelf if there is no preference for your product over competitive products. Why should the retailer put your product on the shelf if they have enough other products that are bringing in similar results for them? You need to know where you are different and where you stand out. Can you make sure that you are contributing to a higher total volume within the retailer? Can you bring in better margins for the retailer? Do you attract a different group of interesting buyers to the store? Then, you have a story and of course, that's also influenced by price. 

Q: I assume that the question of “What is the optimal price” is packed with lots of smaller questions, right? Like, maybe someone is more interested in gaining market share, but the other person might care solely about revenue. So, I assume that there are lots of smaller questions that come together to answer the bigger question of “What is my ideal price point?”  

Yes, but if you look at the total markets, each smaller question on itself has an answer, but, that smaller answer will not really build your business case. Your business cases are really brought together by having full insights on all retailers and your full product range. If you're able to position your brand at the right level and have the right increment, or can achieve the right increment for a retailer, then you're in business. But, when using only promotional activities, typically the contribution margin will be lower for both yourself and the retailer, making you less interesting to them. It's a precious balance. If you have a flagship, you don’t want to destroy it by over promotion or by setting a price point that’s too attractive and potentially ruining the brand image. It is all about relations and price distances versus private labels or versus your main competitor. These things are very important to determine what you can contribute additionally. How you determine this price point is by looking into a price structure overview.  

Let’s look at how larger organizations approach price structure. They look at the price positioning, how they look in the local markets, and the price buildup. From there, they can determine whether there’s room for an additional product, for example, adding a smaller or bigger pack to their current product line and changing the price as a result. Then they can determine the price structure for the segments in the market and the price structure for the brands in the market. From there you can see whether a brand is perceived as a premium one or a value one. This also relates to the marketing message. 

If you're a premium brand, you need to have different marketing campaigns compared to when you are a value brand. As a value brand, you should be quite reluctant to have expensive advertisements because of your margins. It’s a precious balance. You have to look carefully at your portfolio and think about how your assortment is distributed and you must understand how to sell your products properly. That's another aspect that determines the pricing options you have. Imagine you have a two-liter pack and you want to introduce half-liter packs. What should the appropriate price be to maintain the right relation between them? If you have small bottles and big bottles, small bottles typically have a higher average price compared to the big one. This changes, even more, depending on the point of sale. In-store, you will see that the volume price difference between the small bottle and the big one is limited, but when you go in a food-service channel, then the price difference per liter is way bigger. Who wants to walk around with the two-liter bottle? You don't! You want a convenient, half-liter bottle. Those sorts of things also relate to the question of what is my ideal price point? What can you sell? If you have this all in place, then you can optimize for maximum margins without overdoing it and losing volume. 

Q: What should your focus be when looking at price? 

That’s difficult because you shouldn’t just focus on your own product. You must also focus on the retailer impacts and your impact on the competition. You can focus on your price and what it will do to your volume, but make sure to look at the market share impact you make and look at a cutoff point. For example, typically with tipping points from below a certain price, your increment will not grow anymore and when you go above that price, you will certainly see a decline in your sales. So, invest in experiments with your products and pricing.

Q: What data do you need to make it effective? 

Consumer sales data, like volume and price. This should come from the consumer perspective, from yourself, and competition. Agencies like Nielsen or IRI deliver this data. Retailers also deliver point of sale data based on retail scanning data. Distinguishing between on deal sales and regular sales helps make this effective.

Q: Do you also need data in regard to your brand? And do you need to consider this data when setting price? 

If you have it, that's convenient, but it's not a necessity. It's merely for your initial price point setting. It's good for understanding, but it's not mandatory to move forward. That being said, if you are an existing brand, and you want to change or optimize your pricing, you need it.

In Conclusion

Now that you’ve read both of our pricing strategy blogs, you should have a clearer understanding of pricing and how it relates to Revenue Optimization. Understanding pricing allows you to ask the right business questions, find the right focus, and to get the most out of your data. When done correctly, these processes can help you set an optimal price for your product, at the right time, in the right market. 

As mentioned above, if you're looking for more surface-level topics surrounding pricing or you need a refresh on the topics like why pricing matters and the role it plays in Revenue Optimization, read part 1 here.

If you are still looking for more pricing content, check out our webinar--Price Optimization in Revenue Optimization where we covered price elasticities in periods of high demand and shortages, price shocks, finding your optimal price, and more. Access the recording of our Price Optimization for Revenue Optimization webinar below: