Pricing Analytics 1.0

N T T D a t a

G l o b a l I T I n n o v a t o r

1 2 / 1 / 2 0 1 4

Prateek Tyagi,Somya Tripathi

& Tanuj Doshi.

The document offers an overview on Pricing analytics

and its significance in current scenario with concrete

examples and facts.

1

Every organization has something to sell (Product or Service), for a particular group of

customers (Target Market), which they position into a suitable market (Place), at a value which

the consumer must be willing to pay (Price), by creating an awareness of its need and

obtainability (Promotion).

It is a simple concept of Marketing Mix in which these four „Ps‟ i.e. Product, Price, Place &

Promotion are adjusted and an optimal combination is created to fulfill the consumer needs as

well as generating reasonable profits for the organization.

“An important fact here to notice is that „Price‟ is the only element which produces revenue and

determines a firm‟s profitability and market position, while all the other elements represent

costs.”

However, the reality is that the Pricing element is the most neglected element of the marketing

mix because of which organizations are unable to unlock the true market potential and often lead

to missed opportunities and falling margins.

Due to the absence of devoted pricing team, the pricing decisions are often segmented into

various departments based on various non-related factors which lead to misinterpretation of

actual worth of their product or service. Soon the organizations become more focused on their

own cost rather than customer value and perception which again lead to missed opportunities.

Sources:

[1] Data from the Professional Pricing Society (PPS), the world‟s largest organization dedicated to pricing

“Only 5% of Fortune 500 companies have a dedicated team to do the pricing analysis

and only 9% of business schools have a dedicated course on pricing techniques.”[1]

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The right way to do the pricing is the „Value based pricing‟. [2]

The factors which effect the pricing decisions are:

Sources:

[2] Marketing Management by Philip Kotler - 13ed (a South Asian Perspective)

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Ideally, all the above factors should be considered while making a pricing decision by an

organization but usually organizations miss out a few factors.

Data and knowledge are keys in today‟s global competitive environment. In this global village, it

is very necessary to stay ahead of competitors. The quantity of data available today is huge and

large number of transactions keeps on adding every day. This huge data can form the basis of

more profitable pricing analytics.

The term pricing analytics in itself is an in depth concept which will help business improve their

pricing strategies and will form a tool to control pricing for marketing and finance department.

With pricing analytics, companies can unlock new business prospects and improve their market

share. Any small change in price will hamper the flow of business-a dip in price will be

detrimental for the company‟s margin whereas the opposite will be beneficial for the

organization. But in any case, customers are affected. So it is very important that there should be

an enterprise wide standard pricing model that helps an organization to set the optimum price

and hence create a win-win situation for both the organization as well as the customers.

The answer to pricing analytics lies with the customers. Customers have now all access to find

out all offers and best prices. Through pricing analytics, we aim to accurately predict the future

and best prices to improve profitability. Using this analytics, business can make better decisions

by transforming the data to information and use these insights for powerful pricing. Hence

decision makers can make the most of these insights to maximize profitability and increase

customer base with wide offers.

“A small change in price affects directly the operating profit”

“Pricing Analytics could be one possible solution which can help the organizations to make

an optimal decision by capturing all the required factors.”

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Importance:

One of the major factors that will attract a potential customer to buy the product is “price”. It is

very necessary that a company should focus on consumer insights and then quantify their needs

into action. Pricing analytics tools and techniques will cover the much needed consumer insights

and will help in setting an optimal price. It will help organizations do much needed “what-if”

scenarios and see how their customers will behave for different pricing options.

Pricing analytics techniques are very less adopted in today‟s organization, making it the least

used profitable strategy. But to increase the impact of this strategy, organizations should not only

develop an enterprise wide pricing strategy, but also enhance it time to time based on current

market scenarios. With internet penetration shooting up, it is always going to be customer‟s

upper hand in comparing prices of two companies offering the same product. Better the value

offering, higher the sales. Hence pricing analytics will keep organizations always ahead of

competitors and first choice for the consumers.

The questions related to pricing which all the organizations face can be categorized into two

classes.

“Pricing analytics is a simple technique which will help make complex pricing strategies

without any difficulty”

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Most of the organizations today use the traditional analytical tools and techniques to enhance

their decision making process but pricing is one such area which needs a real time analysis.

Traditional tools often lack real time analysis capability. Hence, companies render the services of

third party experts to help them in their pricing related issues but third party helps companies

only at a point of time when problem arises.

Pricing analytics is one such thing which will help the companies in making real time decisions

with proper tools and techniques in place. Also, it will help setting a culture of “informed and

calculated decisions” rather than “guess work”.

By using optimal pricing decisions, which results from pricing analytics, it provides the

organization with multi-million dollar opportunities to drive incremental sales and profit.

For example, Johnson & Johnson medical device subsidiary was able to achieve a 6% increase in

every selling price at a time when competitors had suffered 11% price erosion. Johnson &

Johnson was able to achieve this because of successful pricing analytics implementation. [4]

Sources:

[3] http://mma.com/expertise/pricing-analytics/

[4] http://data-informed.com/b2b-firms-inject-data-analytics-into-pricing-where-instinct-has ruled/

“It has been well proved that by implementing predictive pricing models and tools,

companies can achieve 15-20% improvement in their price and promotion investment

while 1-3% increased sales and 2-5% increased margin.”[3]

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The real usefulness of pricing analytics for setting prices of a product or a service comes into

picture when the following things come into scene and they collide-

But all these three key distinct themes know whatever the case is, customer retention is vital.

Hence data informed decision (analytics + pricing) makes them what to charge from customer.

While pricing the product or service, organizations need to understand-

Pricing analytics is not only about pricing

Companies can use this technique to get in more sales and hence increasing

profitability or in other words, company can reduce the loss of sales due to high

pricing and gain on margins.

Also with the huge data available, strategies for “cross-selling” and “upselling”

can be formulated so as to get new business.

Segment then sell

Both at HP & British Caterer 3663, first they combine analytics related to

segment and then apply pricing analytics to know price proposition and product

attractiveness.

Pricing analytics may suggest an “expert” price perhaps to be used as a starting

point or achieved by an expert sales person.

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British Caterers 3663-At a floor price, sales person will be instructed to walk

away and in between there is a “target price” which represents good deal with an

acceptable margin.

By pricing analytics, HP gives way to “price bracketing” for different segments.[5]

http://data-informed.com/b2b-firms-inject-data-analytics-into-pricing-where-instinct-has-ruled/

To say pricing analytics will:

Boost the profitability by helping companies unlock the potential opportunities.

Standardize enterprise wise pricing strategies thus improving the margins.

Optimize costs and increase margins.

Unlock new margin improvement opportunities.

Help in making calculated and informed pricing decisions.

Pricing Analytics not only provides information about the extent to which pricing can be

improved but it also provides guidance on strategies for closing the gap between current prices

and those which can theoretically achieved.

For example:

Finnish Chemicals, by implementing pricing analytics they closed 5-10% gap that they saw

between target prices and achieved prices. [6]

Sources:

[5][6] http://data-informed.com/b2b-firms-inject-data-analytics-into-pricing-where-instinct-has ruled/

“By using PROS-a pricing analytic and optimization tool, we started focusing on missed deals

through pricing offers and bundles of product and also started focusing on customer expectations

and affordability.”- British Caterers 3663

8

Following is the real time usage of pricing analytics concepts and tools by ‘InterContinental

Group of Hotels’ [7]

About Organization: It is the largest hotel company in the world in terms of number of rooms.

Their revenue management department developed its own revenue management or price

optimization tool by linking pricing data and analytics.

Problem: Major problem faced by them was that they were focusing on inventory optimization.

They were charging price for each room based on the available inventory. Hence they were not

able to unlock the correct price to be charged for each room. In the absence of a correct price

determinant either they were missing consumer surplus or they were missing the unaccomodated

demand.

Principle Challenge:

Complexity in pricing decisions

76,000+ pricing

decisions/hotel/day

Days of Week

Seasonality

Group

Competition

Occupancy Level

Customer Feedback

“For entire IHG portfolio pricing decisions per day are worth over 273 million.”

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Solution: They developed an integrated revenue management tool which combined

capacity/demand, competition & price sensitivity, which are the three basic pillars of optimal

demand and price management. It was different from traditional revenue management tool which

takes care of first pillar-capacity demand. The modules which were introduced in their business

flow process were-

Market response module

Calculates price sensitivity

Competitive rates modules

It eliminates the need of 3rd

party data provider and saves huge amount of money

Price optimization engine

Value Proposition:

Benefits:

They measured an increase of 2.7% in RevPar [Revenue per available room] in 2009 as

compared to industry standards.

It helped IHG to take guess work out of pricing and strengthen their ability to make

pricing decision that bolstered their bottom line results and offer market driven rate to

guest.

Strong desire to establish new vision for revenue management at IHG

Quantification of benefits is critical

It needs to have world class capability

Foremost Challenge: Hotel Acceptance

Price Optimization could be huge win for IHG

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Another metrics-revenue generation index showed a 3% improvement as compared to

competition.

Sources:

[7] https://www.youtube.com/watch?v=KpjWMYKGxxY

“According to third party analyst, if revenue management tool is applied to 40% of the franchise‟s hotel, it would add 1.5% more to profit before tax”