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Picture the following scene: it’s nearing year-end and company executives are immersed in high-level strategic meetings. The objective: improve company profitability in the coming year.
The VP of Sales makes a strong case to offer heavy discounts to your customers. The resulting increase in volume will more than compensate for the drop in price and total dollar margin will improve, they argue. The VP of Finance suggests the company do the opposite: the increased profitability on individual deals will offset the negative impact on volumes. Ultimately the company will be better off. Who needs those heavily discounted customers anyway? Finally, the VP of Marketing announces their ten-step “war plan”, relying heavily on a massive advertising campaign and almost-continuous “can’t miss” promotional offers designed to give the customer as much value as possible.
Our Advice: Let the Analytics Speak
Over the past few years, businesses across a wide range of industries have begun collecting an impressive amount of data on their customers’ purchasing behaviour: time, date and place of the transaction, items purchased and quantity, price paid, etc. Unfortunately, a great number of those businesses make no use of the data they collect when it comes to making strategic decisions.
In a recent survey of retail C-suite executives conducted by the Economist Intelligence Unit, only 36% declared having a well-defined data management strategy. Others simply prefer to rely on less-than bulletproof methods (“what did we do last year?” or “what is your gut feeling, Bob?”)
Interestingly, in the same survey, pricing was one of the top three areas in which data analytics saw the biggest gains. The other two were brand loyalty and multi-channel sales. In other words, transactional data can significantly improve a company’s pricing when properly used. It can certainly indicate how best to ‘spend’ company resources to drive profits, especially when it comes to promotional versus advertising spend.
So Who Was Right?
As we’ve seen through several client projects, the answer – according to analytics – can be quite diverse. At first, that may sound like an unappealing answer for a decision-maker. However, it actually reveals the true power of pricing analytics. Analytics provides firsthand, unbiased customer insights at a highly detailed level, to the point that the company can target specific customer segments with the right action. Thus optimizing the way it ‘spends’ its money.
For instance, it was through data analytics that one of our clients in the consumer packaged goods industry found out that a price promotion on one of its flagship products was best advertised on billboards during the summer (because people hit the roads for weekends or holidays), and on TV during winter (because the majority of professional sports are on). It was a move that improved their bottom line by 6% for this specific product and by almost 2% overall.
For another product, more commoditized than the first, advertising was ineffective whilst limited-time discounting campaigns could increase their margins by 1% (not to mention the hundreds of thousands of dollars saved on the ineffective advertising campaigns!). A third product proved to be highly price-insensitive, leading the company to stop discounting it completely and at the same time, to stop leaving money on the table.
Transactional data analytics addresses one of the biggest (and oldest) challenges of every business: to try and understand what drives customers’ buying decisions. And what better time is there to learn about your customers’ preferences than when they reveal them to you while buying your products and services?
Even though pricing analytics shouldn’t be the deciding factor in honing your pricing strategy, it can, and has become a critical tool for making more informed and profitable decisions.
Article written by Frederic Puech, Director of Analytics at Pricing Solutions. Pricing Solutions is an international pricing strategy consultancy dedicated to helping clients achieve world class pricing competency. Frederic also writes for the Pricing Solutions Club.