Decision Support

Maximize Retail Sales with Price Optimization and Value-based Pricing

Team MakerSights

May 11, 2022

Inflation is driving up the cost of production, which means that companies need to find new ways to cover the increasing material costs while remaining competitive and not pushing away consumers. Achieving this balance requires an understanding of how much value your products offer to consumers—and that's where our price optimization and Value-Based Pricing capabilities come into play. Let’s take a look at them both in detail: 

Price Optimization

In addition to value-based pricing, your company may also use price optimization to boost profits. Price optimization enables businesses to set the most competitive prices for their products by using algorithms that consider a range of factors, including:

  • Market conditions and competitor pricing
  • Previous sales history and performance data
  • The purchase demand for the product or category

The objective of price optimization is to understand how the demand for your products shifts based on pricing changes so you can optimize your margins and manage any variations. The goal is to find the price point that optimizes revenue and profit for a given product. In other words, it's about finding the "sweet spot" where you're making the most money possible without undercutting yourself or pricing yourself out of the market.

MakerSights' price optimization can help you determine the highest price your customers are willing to pay and then maximize that number through various pricing strategies. Whether you're steadfastly loyal to a particular value proposition or want to keep an eye on competitors and adjust as necessary, MakerSights offers the tools, data, and insights needed to accomplish your goals.

Using the conjoint method, MakerSights can give you a sense of recommended price points based on each product style using a demand curve. Then, you can compare that against the core product line and the total market share, using those numbers as a benchmark. 

When determining scope, it should be limited to the number of products or categories available. You can also use MakerSights' consumer profiles and segmentation to dial down even further. With a benchmark established and your market research in place, you're ready to begin experimenting with different price points and testing the impact on revenue, profitability, brand preference, etc.

Price Optimization by MakerSights

Inputs

The inputs for price optimization include:

  • Pricing strategy
  • Market share (an estimate or specific competitor styles to fit in the study)
  • Per-unit costs
  • Imagery and assets for all styles
  • Consumer market segments

Outputs

As the result of your analysis, you can expect to learn the following:

  • How price sensitivity impacts market share
  • The ideal cost and margin by SKU 
  • What your relative profits should be when using the optimal price point—even as prices shift

Value-Based Pricing

If your company is looking for a way to optimize its sales strategy and boost profits, value-based pricing may be the solution. By understanding which product features drive the most value for consumers, you can price your products at just the right level to maximize your profit margin while still meeting customer needs. Value-based pricing can also be helpful in determining which features are not necessary for your consumers, enabling you to cut costs and increase margins by removing them. This approach is immensely helpful when configuring new products and introducing new styles. To get started with value-based pricing, consider using technology like MakerSights.

Value-based pricing depends on the product's perceived value based on key features and design details, which is often referred to as the customer's willingness to pay. Before diving into how this works, it's worth reviewing the three main influences on perceived value to ensure we're working from the same starting point.

  1. The Market influences how much a consumer is willing to pay for a product.
  2. The Benefit a product provides to the customer impacts its perceived value.
  3. Competitor Pricing can affect the value consumers attribute to a product.

As a bonus, if you price the item slightly below the amount that your customer is willing to pay, you have the potential to create 'customer delight.' This difference tends to be returned to companies in the form of customer loyalty, referrals, and general enthusiasm about your brand and products, which can carry you further than a few more dollars of profit margin on each sale.

MakerSights Value-based Pricing Test

How Is Value-Based Pricing Calculated?

MakerSights uses the conjoint methodology to understand how various attributes compare to one another based on their importance to the consumers. This process enables you to learn which features have the most value to your customers through options and survey questions. 

Inputs

The following data is input into the value-based pricing analysis. To get accurate results, it's crucial to include all of the details and combination of options, including:

  • 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

The results will help your company focus on the most impactful aspects of your product line. The results may surprise you! This macro-level analysis will also help determine if the high-value attributes differ across various categories and consumer profiles.

You can also rank attributes by how useful they are. If you have two competing variants, the ranking can help you decide which to eliminate to boost the perceived value of your products and avoid cannibalization.

Overall, value-based pricing provides a way to ensure your products are priced competitively without sacrificing their quality or features. Leverage MakerSights' analytics to understand what matters most to your customers and which aspects of the products contribute most to their perceived value. This way, you can ensure your pricing strategy maximizes profits while keeping customers happy.

Conclusion

By understanding the value consumers place on products, companies can optimize their prices to cover their costs while also providing a fair price to customers. Price optimization tools like those offered by MakerSights can help businesses identify the best price for each product and adjust their strategies to maximize 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 help your business navigate the current economic climate and come out ahead in the long run.

If you’d like to learn more about how brands are driving more revenue with Value-based Pricing and Price Optimization from MakerSights, let’s talk!

Team MakerSights

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