The last couple of years have not been kind to retailers’ profit margins. Rising inflation, supply chain shortages, fear of recession, and excess inventories have whipped up the perfect storm. 

Brands must find ways to cover increased production costs without pushing increasingly cost-conscious consumers toward competitors. Meanwhile, inventory leftover from mid-pandemic “panic buys” has heightened the risk of creating new products and given way to haphazard discounts that wreak havoc on brand integrity.

Hitting target margins has become a game of whack-a-mole for product managers and merchants — not that it was ever a particularly easy or precise exercise for most brands. But taking a more methodical, highly strategic, and differentiated approach to pricing products is no longer an option. And doing this effectively requires brands to gain a much deeper understanding of their current and aspirational consumers’ willingness to pay.

Enter pricing optimization. Pricing optimization delivers insight not only into consumers’ willingness to pay, but also into their price awareness, price sensitivity, and competitive considerations. The results empower product managers and merchants to confidently price products in a way that optimizes margins while maximizing demand and protecting brand value. 

The rest of this post will focus on MakerSights' two key analytical pricing outputs: price optimization and value-based pricing. Let’s dive in!

Price Optimization

Price optimization enables businesses to set the most competitive prices for their products by understanding how demand shifts as pricing changes. It’s all about finding the "sweet spot" where you're making the most money possible without undercutting yourself or pricing yourself out of the market.

But if you thought this exercise was as easy as asking consumers what they’re willing to pay for a product, think again! If given the option, consumers will always choose the lowest price possible, even if they’re willing to pay more. While some voice of consumer platforms still take this outdated approach, it’s simply not reliable. 

The most accurate method for determining price optimization is using a version of conjoint analysis tailored specifically for the retail industry. This approach measures price acceptance indirectly by mimicking a true e-Commerce shopping experience and considering a variety of key inputs before recommending price points for each item. Using this demand curve as a benchmark, it’s possible to then begin experimenting with different price points and testing the impact on revenue, profitability, brand preference, and more to achieve the optimal price.

Inputs

When done correctly, price optimization is a highly involved statistical exercise. The best voice of consumer vendors have sophisticated algorithms that can integrate and analyze a number of relevant factors including:

• Pricing strategy
• Market share (an estimate or specific competitor styles to fit in the study)
• Per unit costs
• Consumer market segments
• Market conditions 
• Competitor pricing
• Previous sales history and performance data

Outputs

Price optimization testing yields a number of intriguing data points. But for this information to truly be impactful, it must be delivered in a timely fashion and a format that’s easy for teams to digest – even for data novices – and immediately actionable. Some of the insights you should expect to uncover include:

• How price sensitivity impacts market share
• The ideal cost and margin by SKU 
• Relative profits at optimal and shifting price points
• How pricing shifts based on consumer segment 

Value-Based Pricing

In addition to understanding the ideal price for items, many brands also want to know which specific product attributes are contributing to these prices, which is where value-based pricing comes into play. Value-based pricing measures a product's perceived value based on key features and design details, like colorways, fabrics, closures, and more. 

By identifying which product features drive the most value for consumers, you can price products at just the right level to maximize profit margin and drive brand equity while maintaining customer satisfaction. Value-based pricing is also helpful when creating new products and crafting a line. Identifying high-cost features that are not necessary to your consumers or don’t add value in their eyes enables brands to save money and increase margins by removing them from the final product. 

The best way to measure value-based pricing is — you guessed it — conjoint analysis. Top vendors use this methodology to ask consumers survey questions that indirectly measure their willingness to pay for certain product attributes versus others.

Inputs

Value-based pricing analysis requires brands to provide the following information:

• A set of consistent attributes (e.g. material, logo style, etc)
• Variants within each attribute
• Imagery and assets for all combinations of visible attributes
• Price points
• Consumer market segments (e.g., women aged 18-35)

Outputs

Value-based pricing outputs will help your company focus on the most impactful aspects of your product line, and the results may surprise you! Here are some of the insights you can expect:

• Product attributes driving perceived value
• Product attributes contributing to unnecessary costs
• Differences in high-value attributes across categories and consumer segments
• Feature rankings and comparisons

Game Over

By understanding the value consumers place on products and how demand shifts in response to price and other market variables, companies can optimize their prices to cover their costs and drive more sales while also providing a fair price to customers. Pricing optimization helps teams win the game of “margin whack-a-mole” and take a more strategic approach to pricing every product in a way that consistently maximizes profits.

With these insights, your company can ensure that the price of your products falls in line with customer expectations, so you always stay competitive in the market. This approach will not only help your business navigate the current economic climate but also come out ahead in the long run. 

To learn more about how MakerSights’ pricing optimization, download this helpful PDF.

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