How to keep your prices at an optimum level

Market volatility, wage inflation and the spiraling cost of raw materials has forced many businesses to increase prices. But doing so without damaging sales or customer trust is a careful balancing act. Data scientist Ali Habasha explains why intelligent pricing is the answer.

“Historically, a lot of organisations, especially B2Bs, have applied blanket price increases. However, this can really hurt your business when, in periods of economic volatility, you’re forced to make significant price increases to recover your margins and hit your numbers.”

Ali uses his background in data science to help companies take a more data-driven and forensic approach to their pricing policy. Working across sectors including travel, hospitality, retail, fashion and FMCG, Ali harnesses company, customer and market data and uses advanced analytics and machine learning to continuously optimise prices. 

An in-depth understanding

“One of my recent clients wanted to raise prices, but was worried that a general price increase would hurt long term profitability and damage relationships, so they were looking to vary the price increases for different customers. 

“Working with them, I carried out detailed segmentation of customers, their needs and purchasing habits. What were they buying and when? Who was buying in high and low volumes? What was the product mix and cost of those products? Which products were loss-making? 

“We built all this and more into a pricing engine, along with certain business rules and constraints, and the results gave us optimal prices per product and customer. This allowed the business to know which prices to increase and by how much, without damaging the customer relationship.”

A wide range of data can be built into the engine such as customer purchasing history, market and seasonal trends, failed-bid information and competitor pricing. Beyond that, net promoter scores and voice-of-the-customer information can also be used to understand the value customers derive from products and services. 

A pricing engine is relatively simple to set up and easy to maintain, and because the impact can be seen directly, it’s easy to measure ROI

A simple set-up

Thanks to advances in cloud computing and off-the-shelf analytics tools, a pricing engine is relatively simple to set up and easy to maintain, and because the impact can be seen directly, it’s easy to measure ROI.

“Using technology, you can very quickly build and stress test different models against different scenarios to see what would happen if you applied them,” Ali says. “So, what would be the result if you dropped your prices? Would you take market share from your competitors? Would you cannibalise your own products? If you raised them, would sales take a hit? All of this can be simulated before going live to mitigate any risks.” 

The businesses Ali’s worked with have typically seen an increase in profitability of 6-12% within six to nine months. He recently helped a boutique hotel add dynamic pricing based on supply and demand that resulted in a 12% profit increase.  

Getting the data in shape

Of course, models are only as good as the data you put into them, so every project starts with a data maturity and validity check. 

“If a company doesn’t have the data, we can build a roadmap looking at what stage the company is at, and what’s feasible to achieve. At the same time as improving data capture, we can start by building simple models to fix the most urgent problems. Then as new data comes in, we can build more complex, nuanced models with things like demand dynamics and forecasting. 

“But even with rudimentary data we can get a simple pricing model into production in around six months that will be good enough and dynamic enough to deliver substantial value.”

For an intelligent pricing project to work, all parts of the business have to be on board. Ali typically reports into the head of pricing or COO, but the CTO and their team also need to be involved to ensure the technological capabilities are in place. In a B2B setting, the commercial team will play a key role in delivering the new prices – and capturing direct feedback from customers – while the CFO will want to pay close attention to the financial benefits and return on investment. 

Don’t put your profitability at risk

“In today’s volatile market, intelligent pricing is something all companies need to be looking at,” he says. “Done correctly, it will give you the ability to continuously monitor your prices, understand how your customer reacts to them and put targeted pricing remedies in place that won’t jeopardise your relationships. 

“Gone are the days when you should be blindly applying blanket increases or discounts and hoping for the best – to do so puts your profitability, and future, at risk.