Pricing is one of the most powerful ways of enhancing sales and profitability. Research indicates that price management initiatives can improve a company’s margins by 2-7% in 12 months*. However, the major barriers to being able to do this successfully are poor data foundations and a lack of visibility into all product lines and customers.
Traditional methods have focused on price elasticity - the responsiveness, or elasticity, of the quantity demanded of a product or service to a change in price when nothing but price changes. This method can be insightful but in real-world scenarios and experiments, making sure all factors stay constant and only price varies can be unrealistic. Enter data science.
We used a forecasting method, with a number of predictors, to forecast how customer numbers could change with price. As inputs we used historical customer numbers per month, number of internet subscribers, consumer confidence, consumer price index, consumer price index adjusted prices, inflation and product price. This type of forecasting model allowed us to forecast how customer numbers could change given over 20 different future pricing scenarios per product. This information was exactly what one of our clients was interested in.
For this particular client, the model performed consistently across all of their products. Based on our forecasts, the client made price adjustments to a number of products. After the price adjustments were made, we monitored their customer numbers to assess how well our forecasting model had performed. For all products with varying price adjustments made by the client, our model forecast customer numbers to within 2% of actual. So the model performs extremely well as a forecaster of customer numbers for a given change in price.
Instead of just identifying how elastic products are, this type of method provides organisations with a tool they can use to experiment with price changes. In highly competitive industries, and with consumers under increasing financial pressure, this can really have an impact on an organisation’s margins.
* Getting pricing right. The value of a multifaceted approach. L Montain, T Kuester, J Meehan