Price optimization is one of the most important factors in revenue management and price management. This term refers to the maximum price your company can charge for a product or service and achieve maximum sales.
For example, if your company specializes in selling widgets and you’re charging $11.99 per widget and selling 400 widgets per year, you’re making $4796 in revenue per year (and should probably consider getting into a more lucrative business). Now, if you increase the price to $12 and your sales remain unaffected at 400 widgets, your revenue actually goes up $4.
Now let’s say that you decided to raise the price to $12.01 and your sales fell to 399. Your revenue would be $4791.99. The price went up, but it was to small to account for that lost widget. You made $4.01 less in revenue at the $12.01 price point and you made $4 less in revenue at the $11.99 price point so you know that $12 is the optimal price point.
In this example, all the information is readily available and the figures are pretty easy to deal with. In the real world you’ll probably be dealing with much larger figures (let’s hope so for you and your company’s sake) and you might not be able to afford toying with the price points so how can you find that optimal price point?
Many companies offer price optimization software that can help you strike that perfect balance between price and sales using a variety of different metrics and proprietary technologies.
Zilliant, for example uses a proprietary technology known as Purchase Pattern Profiling to recognize incremental growth and retention opportunities that will add, on average, 11 percent more revenue to your company. Zilliant also gives each subscriber to its service a dedicated Customer Success Manager who is consistently engaged in ensuring that your company is getting the most out of Zilliant’s offerings.
SAP, the largest business software provider in the world, offers a price optimization software that takes a number of factors including price elasticity into account and gives your managers data-driven scenarios under each possible price point. You can get accurate and detailed looks at how customers will respond to these price points and that can help your company find that perfect balance.
That begin said, don’t make the mistake of thinking price is everything. In a New York Times article, Mike Faith, Chief Executive Officer of Headsets.com related an interesting story about his company. In 2008, a computer error caused all the products on his company’s site to be listed at cost rather price. One would have expected the increase in sales to be massive, but Faith said the increase nominal. It reinforced in his mind the fact that most of his company’s sales are driven by its people and the relationships they develop with customers.
“Every call we get is answered by a human being within four rings,” he said, “and our reps are well trained and know a lot about the headsets.”
Finding that ideal price point is crucial to running an efficient business, but don’t make the mistake of thinking that once you’ve achieved price optimization the work is over. That is just one part of building a company that is efficient from the top down. Some customers are going to be swayed on price and others are going to be more sensitive to customer service. The only way to ensure your business’ success is to pay close mind to all of the areas that affect your customer’s purchasing decisions.