New strategies of businesses in the digital era
Product pricing is moving from art to science.
The manufacturer’s self-promoting retail price is a very rare business tactic in America’s liberal capitalist society. PH Hanes, the founder of the HanesBrands textile mill, came up with the idea in the 1920s. This allowed him to use print advertising all over the United States to limit the number of distributors shouting prices. his knitwear buyers.
Even today, many U.S. dealers have to consider manufacturers’ recommendations if they want to raise prices to offset inflationary pressures affecting their other costs. However, more and more people are using more sophisticated pricing techniques.
Research from 2010 by consulting firm McKinsey, a consulting firm, estimates that a 1% price increase without reducing sales can increase business profits by an average of 8.7%. Doing this seems to be a difficult problem. Overvaluing puts businesses at risk of losing customers; undervalued and missed the opportunity to profit.
In the past, retailers often used general rules, such as adding a fixed margin to the top of the cost or calculating it to match the prices offered by competitors. When the cost of operating machinery, labor, and other inputs became expensive, they could no longer treat pricing as an afterthought.
To get an edge, store owners turned to a price optimization system. This method predicts how customers will react to different pricing scenarios and recommends those that optimize sales or profits. At the core of the business are mathematical models that use loads of transactional data to estimate price elasticity — how much demand increases when price falls and vice versa — for thousands of products.
Then, price-sensitive items can be discounted, and price-insensitive items raised. Sellers can refine algorithms to eliminate unwanted results, such as double-digit price increases or larger packages that will cost more than lighter packages.
These systems are becoming smarter by the day thanks to advances in artificial intelligence (AI). Whereas older models used historical sales data to estimate price elasticity of individual items, the AI-powered results can point to similarities and relationships between many products.
Pricefx’s Doug Fuehne says makers of business valuation software are incorporating new sources of data into their models, such as customer comments to online product reviews. The cloud platform developed by Eversight, another supplier of pricing software, allows retailers to check how a slight increase or decrease in Heinz ketchup at different stores affects sales. sales not only of that particular spice but across the entire category. The software is used by major manufacturers such as Coca-Cola and Johnson & Johnson, as well as some supermarkets (Raley’s) and clothing businesses (JCPenney).
All of this makes for a much more multidimensional pricing system, says Chad Yoes, a former executive at Walmart who oversaw pricing here. Retail store owners are keen to promote this sophistication to investors who value the pricing power of companies at a time of high inflation. In February, coffee shop chain Starbucks, boasted of using data analytics and AI to model pricing “on an ongoing basis.” us Foods, a food distributor, prides itself on the pricing system’s ability to use “more than a dozen different inputs” to drive sales and profits.
Optimizing prices can make them more volatile. “Retailers today are pricing items faster than ever,” said Matt Pavich of Revionics, another pricing software company. That’s especially true in the rapidly evolving world of e-commerce. Even Walmart reviews the prices of many items in its stores two to four times a year, said Mr. Yoes, compared with a few years ago when it only did once or twice.
One of the biggest misconceptions about pricing software is that they’re just meant to increase the price of an item. Sysco, a major food distributor that launched new pricing software last year, is a prime example of countering that mistake. The company says the system allows it to lower prices on “critical value items” – like price-sensitive bestsellers known in the commerce sector – and raise prices on other products. . Therefore, it can increase profits by expanding sales while maintaining profit margins. That keeps investors happy and shoppers happy.
Source: Economist
at Blogtuan.info – Source: cafebiz.vn – Read the original article here
