Price optimization is the use of

mathematical analysis Analysis is the branch of mathematics dealing with continuous functions, limit (mathematics), limits, and related theories, such as Derivative, differentiation, Integral, integration, measure (mathematics), measure, infinite sequences, series ( ...

by a company to determine how customers will respond to different prices for its products and services through different channels and is in contrast to

market value Market value or OMV (open market valuation) is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with ''open market value'', ''fair value'' or '' fair market value'', although t ...

. It is also used to determine the prices that the company determines will best meet its objectives such as maximizing

operating profit In accountancy, accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profit (accounting), profit that includes all incomes and expenses (operating and Non-operating income, non-operating) except interest expense ...

. The

data Data ( , ) are a collection of discrete or continuous values that convey information, describing the quantity, quality, fact, statistics, other basic units of meaning, or simply sequences of symbols that may be further interpreted for ...

used in price optimization can include survey data, operating costs, inventories, and historic prices and sales. Price optimization practice has been implemented in industries including retail, banking, airlines, casinos, hotels, car rental, cruise lines and insurance industries.

Overview

Price optimization utilizes

data analysis Data analysis is the process of inspecting, Data cleansing, cleansing, Data transformation, transforming, and Data modeling, modeling data with the goal of discovering useful information, informing conclusions, and supporting decision-making. Da ...

to predict the behavior of potential buyers to different prices of a product or service. Depending on the type of methodology being implemented, the analysis may leverage

survey data Survey methodology is "the study of survey methods". As a field of applied statistics concentrating on human-research surveys, survey methodology studies the sampling of individual units from a population and associated techniques of survey dat ...

(e.g. such as in a conjoint pricing analysis) or

raw data Raw data, also known as primary data, are ''data'' (e.g., numbers, instrument readings, figures, etc.) collected from a source. In the context of examinations, the raw data might be described as a raw score (after test scores). If a scientist ...

(e.g. such as in a behavioral analysis leveraging '

big data Big data primarily refers to data sets that are too large or complex to be dealt with by traditional data processing, data-processing application software, software. Data with many entries (rows) offer greater statistical power, while data with ...

' ). Companies use price optimization models to determine pricing structures for initial pricing, promotional pricing and discount pricing. Market simulators are often used to simulate the choices people make to predict how demand varies at different price points. This data can be combined with cost and inventory levels to develop a profitable price point for that product or service. This model is also used to evaluate pricing for different customer segments by simulating how targeted customers will respond to price changes with data-driven scenarios. Price optimization starts with a segmentation of customers. A seller then estimates how customers in different segments will respond to different prices offered through different channels.Arie Shpanya (2014)
"There's No Such Thing As One Right Price in Retail"
/ref> Given this information, determining the prices that best meet corporate goals can be formulated and solved as a constrained optimization process. The form of the optimization is determined by the underlying structure of the pricing problem. If capacity is constrained and perishable and customer willingness-to-pay increases over time, then the underlying problem is classified as a

yield management Yield management (YM) is a variable pricing strategy, based on understanding, anticipating and influencing consumer behavior in order to maximize revenue or profits from a fixed, time-limited resource (such as airline seats, hotel room reservat ...

revenue management Revenue management (RM) is a discipline to maximize profit by optimizing rate (ADR) and occupancy (Occ). In its day to day application the maximization of Revenue per Available Room (RevPAR) is paramount. It is seen by some as synonymous with ...

problem. If capacity is constrained and perishable and customer willingness-to-pay decreases over time, then the underlying problem is one of

markdown Markdown is a lightweight markup language for creating formatted text using a plain-text editor. John Gruber created Markdown in 2004 as an easy-to-read markup language. Markdown is widely used for blogging and instant messaging, and also used ...

management. If capacity is not constrained and prices cannot be tailored to the characteristics of a particular customer, then the problem is one of list-pricing. If prices can be tailored to the characteristics of an arriving customer then the underlying problem is sometimes called customized pricing.

Price optimization software

Price optimization software is an example of

business software Business software (or a business application) is any software or set of computer programs used by business users to perform various business functions. These business applications are used to increase productivity, measure productivity, and per ...

available to companies to support key business functions. Software companies have developed price optimization software packages to handle complex calculations. Companies have tailored these to meet the needs of

B2C Direct-to-consumer (DTC or D2C) or business-to-consumer (B2C) is the business model of selling products directly to customers and thereby bypassing any third-party retailers, wholesalers, or middlemen. Direct-to-consumer sales are usually transa ...

organizations, such as retail, or B2B companies, such as those who require more complex quoting. Another common use of pricing software and pricing systems is for companies, both B2C and B2B, with a large number of products/articles sold in a wide range countries using different currencies and with commercial arrangements. Here, the complexity of combinations and permutations is an example of a big data solution where the seller can create central pricing strategies that then can be applied and executed across the organization. A further development of pricing software, especially in B2B companies, is to integrate this with software that configures larger, customized systems and solutions, and then also to integrate this with software that transforms the configuration and resulting price into a customer offer/quotation. The combination of configuration, pricing and quoting solutions is abbreviated to CPQ solutions. Manfred Krafft and Murali K. Mantrala discuss the use of price optimization software in the retail industry and the paradigm shift from price optimization to pricing process improvement in their book ''Retailing in the 21st Century: Current and Future Trends'', published in 2006. The book mentions that the research conducted on price optimization by its traditional definition is not applicable to the retail industry, and they recommend retailers adopt a process view of pricing.

References

{{reflist Fundamental analysis Pricing

Overview

Price optimization software

See also

References