Price optimization — Introduction
Price optimization is based on the elasticity of the demand for the goods. Businesses require the Price optimization strategy to price their products to reach their company goals. It is very important for companies to know what to price their products and applied to almost every business.
Where it is required?
Airlines industry
Retail sector
Hotel industries
Banking
Local stores, etc……
To build a price optimization project, we need sales data of customer records who already purchased some items. The data sources can be offline and online. The data is being gathered in different ways like survey data and previous sales data.
Price elasticity depends on the purchase behavior of the customers to predict their buying patterns which help business owners price their items and more gain profits and more revenues.
Price elasticity of demand is a calculation that measures the ratio of the percentage change in the amount demanded of a good or service to a percentage change in its price.
What is price elasticity?
Price elasticity of demand is a measurement of the change in consumption of a product in relation to a change in its price. Expressed mathematically, it is:
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
Elasticity
If the quantity demanded of a product changes greatly in response to changes in its price, it is termed “elastic”.That is, the demand point for the product is stretched far from its prior point.
Examples of Elastic Products
Common examples of elastic products are consumer discretionaries, such as a brand of cereal. Certain food products are not a necessity. For instance, it’s reasonable to argue that people would stop buying a particular brand of cereal if its price shot up dramatically, particularly if other comparable products didn’t follow suit and kept their prices the same.
Inelasticity
If the quantity purchased shows a small change after a change in its price, it is termed “inelastic.” The quantity didn’t stretch much from its prior point.
Inelastic products are necessities and, usually, do not have substitutes they can easily be replaced with.
Examples of Inelastic Products
The most common goods with inelastic demand are utilities, prescription drugs, and tobacco products. In general, necessities and medical treatments tend to be inelastic, while luxury goods tend to be the most elastic.
Some of the strategies to price the products
Price skimming
Competition based pricing
Perceived value-based pricing
Demand-based pricing
Penetration pricing
premium pricing
In this article, I just covered the basics of price optimization and prerequisites to remember before working on the price optimization project which I will be covering in the next article.
Coming up, I will analyze the sales data and will be performing some price optimization techniques on the data and I will also write some brief explanation about the techniques and procedures to follow while analyzing the sales data.
