What do we mean by 'price optimization'? Conversations from the PPS Fall Conference
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
Pricing consultants and pricing software often promise to optimize prices. What do people mean when they say this?
Once upon a time, the term meant setting the right price level to optimize for volume, or for revenue, or for gross margin (these are typically all different price levels). In the past, this was done by trying to estimate the price elasticity of demand, but over time we realized that this is a fool’s goal as there is more than one type of elasticity, elasticities are dynamic (they change over time, sometimes quite quickly), and they differ across market segments.
The response was the development of fancy price optimization algorithms, implemented in software pricing platforms (which also manage parts of the pricing process) and recently have been augmented by deep learning and other forms of artificial intelligence.
Is this what ‘price optimization’ still means? Is there a difference between ‘price optimization’ and ‘pricing optimization’?
These questions came up in a fascinating conversation I had in an Uber ride I shared with Jose Paez from Pricefx. We decided to test them with a couple of LinkedIn polls. We asked both …
“When I say 'price optimization, I mean”
and
“When a non price customer hears 'price optimization' they understand”
Here is the response to the first question.
And to the second question.
Comparing to the two answer sets.
Take this with a grain of salt. These results come from members of the Professional Pricing Society. We are all guessing what non pricers understand. I plan to test this in other communities and will report back in a few weeks with what I find.
One interesting comment was that ‘price optimization’ and ‘pricing optimization’ mean different things.
Pricing optimization means ‘a holistic solution to improving pricing processes.’
Price optimization means ‘optimizing the price level and terms to achieve a specific goal.’
That is an interesting point, but I wonder if it is more nuanced than how most people understand and use the terms.
Overall, pricing professionals are moving towards providing holistic solutions to pricing challenges. That is a good thing. Pricing is about a lot more than just putting a number on a price tag. Good pricing integrates all four of Gerry Smith’s 4Cs of pricing.
Customer Value (V2C or Value to Customer)
Customer Willingness to Pay (WTP)
Competitors
Costs
See The 4Cs of pricing and how they interact.
Price setting is a poor frame for pricing work, which is about a lot more than picking a number. Pricing is designed and should be designed to be adaptive and able to change with the market. Pricing should even be used to shape the market. Good pricing needs processes to do this. Pricing optimization as a holistic solution to pricing moves us in that direction.