Five reasons to have a pricing tool

The vast majority make their decisions based on costs, adding a desired profit margin to the cost of their products or services. Others blindly follow competitors’ prices, without considering differences in the value customers perceive or their level of price sensitivity. Finally, there are companies that simply play with discounts and promotions depending on how sales are performing—if sales are down, they increase the discounts offered.

Below are five reasons why every business should have an analytical pricing management tool, such as PGP by prexus:

It considers all the necessary variables
The pricing management process in a pharmaceutical company required an analyst to spend three days a month reviewing the prices of a portfolio of more than 500 products. The analysis included reviewing competitor prices and market share information. The logic was straightforward: product prices had to be aligned with the main competitor and 10% above the third in the market. If the market share for a specific product was below expectations, prices needed to be slightly more aggressive. Period.

As a result, the business’s profitability had been eroding over the past few years. Although they had managed to maintain market share, prices had fallen so much that the brand began losing value in periodic brand equity measurements.

It is not enough to consider only costs and competitor prices. A robust pricing tool also considers the value customers perceive, their level of price sensitivity, and the elasticity of each solution in the portfolio, among other variables.

The human eye is not enough
The personal care category manager of a major supermarket chain did an excellent job optimizing the price of the best-selling toothpaste in the category: he considered perceived consumer value, price sensitivity, costs, and even a sales impact projection based on measured elasticity. However, in his manual review process, he failed to ensure consistency with substitute products—other sizes, versions, and brands.

As a result, it was cheaper for customers to buy two small tubes than one large one. This led to high levels of cannibalization of the main product and widespread value destruction across the category.

Even the most experienced pricing professionals struggle to identify opportunities across hundreds or thousands of SKUs. A good pricing tool guarantees the identification of opportunities across 100% of the portfolio.

No dependence on experts
A large textile company was fortunate to have a CEO with more than 30 years of industry experience, 20 of them within the company. He personally made all pricing decisions and, to be fair, they were quite accurate. The day of his retirement arrived, and despite training the commercial manager for some time, the effects were quickly felt in pricing management.

The inertia of good past decisions ran out quickly, and chaos took over the organization. As a result, the company began losing sales and profitability across business lines, affecting dividends for shareholders.

Even when an organization has pricing experts, relying solely on them to make pricing decisions is risky. A pricing tool enables any user to reliably operate the pricing management process.

It delivers concrete recommendations
A construction supplies company had a fairly robust pricing process. Most of the necessary variables were considered, and the process was documented and decentralized. However, the recommendations generated by the methodology used were very general and applied to each product line.

As a result, price changes were applied uniformly across all SKUs within each line. This worsened issues in some products and significantly reduced the possibility of optimizing overall business profitability.

Traditional pricing processes tend to produce broad conclusions and recommendations by product line. A good pricing tool generates specific recommendations for each solution in the portfolio.

Simulation of multiple scenarios
A restaurant chain developed a pricing process with which it finally felt comfortable. It had been using it for the past 18 months, and profitability had improved significantly. When the company faced changes in its shareholder structure, business objectives and priorities shifted—even though profitability was solid, transactions were declining, putting medium-term sustainability at risk.

The new board of directors asked management to adjust the methodology used to define prices to correct the negative trend in transactions. Although they ultimately succeeded, it took nearly a year to identify the necessary adjustments and implement the solutions.

Generating pricing recommendations does not necessarily mean optimizing them. A good pricing tool allows projecting the financial results of multiple scenarios, ensuring that the business achieves its expected objectives.

In summary…
Pricing tools are not meant to replace anyone in the organization, but to help maximize the effectiveness and efficiency of decision-making. The artificial intelligence used in the best existing tools aims to perform tasks previously carried out by humans—but faster and with fewer errors. As John McCarthy, father of artificial intelligence, said, “Human intelligence can be described so precisely that a machine can be made to simulate it.” That is precisely what pricing tools like PGP by prexus achieve.