top of page

Price Optimization Methods to Model and Maximize Profits

The power of pricing research and price optimization constantly inspire me to help companies make smarter decisions that benefit their business and customers. Getting pricing right is no easy feat – it requires balancing willingness to pay, profit margins, competitive positioning, and more. However, leveraging the right research techniques can provide invaluable clarity.


In this article, I'll provide an insider's overview of the following:



I aim to demonstrate why pricing research is a must-have capability and provide advice to help you implement impactful studies.


The Genesis of Price Optimization 


My "aha moment" regarding pricing research came during a mundane errand - shopping for a new phone.


I was weighing my options between memory size and camera quality along with my budget. One phone was a little more expensive, but it wasn't so expensive that I didn't want to consider it, and it included all the features I wanted and then some. I might have gone in with a budget, but I walked out with a phone that was a little bit more expensive than I had planned.


During this process, I realized that the smartphone maker knew just the right levers to pull to get me to spend more money in the store. It's like they had a way of uncovering what I was actually willing to pay for those few upgrades.


Having a mathematics background, I envisioned they were using some sort of "model" to determine the right features at the right price point and I wanted to learn more. If there was a way that companies could use data and analytics to price their products at the maximum price possible without losing sales, I wanted to learn about it. And the rest is history!


Demystifying Price Optimization 


At its core, pricing optimization involves identifying price points that balance a willingness to pay among a large enough audience that will help you reach your revenue and profit goals. Specifically, it identifies "win-win" prices where enough customers purchase to drive profitability without leaving money on the table. 


If the price is too low, you fail to capitalize on willingness to pay. If the price is too high, customers pivot to a competitor. While basic surveys offer some guidance on pricing, advanced analytic techniques provide enhanced precision and we find the sweet spot using research-based models such as Van Westendorp, Gabor-Granger and Conjoint Analysis.


Each method has distinct advantages and limitations, but all offer invaluable directional insights over blindly guessing at pricing. Conjoint analysis stands out, given its ability to holistically optimize products and position them for maximal revenue.


Overcoming Challenges with Pricing Research


Companies often struggle with pricing dilemmas rooted in unpredictability and complex interdependencies. However, methodical research provides helpful solutions such as: 


Quantifying Willingness to Pay


Without studying how people react to pricing tradeoffs, willingness to pay remains a black box. Conjoint analysis and simulations uncover this critical information.


Untangling Complex Interactions Between Price, Features, and Positioning


The connections between product pricing, configurations, attributes, and positioning can confuse teams. Analytic studies parse these intricate relationships to reveal profit-maximizing formulae for your specific brand, with your specific features all within an ever-changing competitive landscape.


Achieving Alignment on Pricing Objectives 


Executives commonly clash on pricing goals. Should we chase maximum market share or profits? Research models can forecast financial and customer adoption outcomes under different scenarios to facilitate unified direction and empower analytically confident pricing.



Sneak Preview of Post-Launch Market Reception 


Predicting real buyer reactions pre-launch requires informed projections, not guesswork. Analytic assessments forecast adoption levels and optimal pricing strategies.


In essence, methodical research takes the big questions in pricing decisions and breaks down the unknowns into clear, measurable factors. Both tactical conundrums and high-level disagreement amongst leaders are conquerable with data-driven studies quantifying tradeoffs. Carefully designed analysis replaces guesses with facts. Science is the tool that can unravel the puzzles complicating profitable pricing for companies struggling in many industries.


Top Lessons for Pricing Research Success


Over the years, I've learned a few things about conducting pricing studies successfully:


Test Far-Out Prices


It's tempting only to assess pricing we're comfortable with or assume makes sense. However, it's essential also to include both high and low-priced scenarios. Doing so fully maps sensitivity, uncovers hidden opportunities, and prepares for competitors.  Plus, our models can always "interpolate" between price points, but it gets much harder to model what might happen if we price a product outside the bounds we tested in the research. Is the sensitivity flat, steep, or somewhere in between? Plus we'll often want to model our products at MSRP but also on ASP. Having a wide range of prices allows this flexibility.


Get Everyone's Goals Aligned Upfront


Pricing debates often trace back to mismatches on what different leaders prioritize - profits, share, etc. Nail down shared objectives so research insights land with impact.


Provide Consultants with Crucial Background Details


Give partners an insider view into margins, constraints, and other uniquities so recommendations remain realistic and actionable within your business context. If you have skus that move in lock-step (product A must always be at least 10% higher than product B), share that information!


Leverage Advanced Analytic Approaches


While basic surveys help, leveraging an advanced technique like conjoint analysis can enhance your precision by modeling tradeoffs. Sophisticated analysis pays off even if it might take longer or be more expensive.


These steps will help your organization maximize lucrative opportunities revealed through research.


Cutting-Edge Pricing Research Methods


I'm excited about three emerging techniques set to transform pricing research:


Virtual Reality Store Simulations


VR can creates life-like store simulations where researchers can instantly shift prices and products to evaluate reactions. Consumers explore shelves, evaluating tradeoffs more naturally than surveys allow. Not to mention, VR+AI allows for easier creation of different product skus to get reactions to much quicker than previous ways of concept testing.


Artificial Intelligence Optimization


Speaking of AI, imagine an e-commerce storefront that leverages AI algorithms to analyze pricing data and run machine-scale virtual experiments to optimize profits. Dynamic testing of pricing powered by AI will enable businesses to adapt rapidly to consumer preferences and market changes.


Augmented Reality Behavior Tracking


As augmented reality smart glasses become mainstream, we'll gain access to volumes of behavioral data during the purchase experience. This real-time insight into pricing reactions and shopper habits will fuel modeling.


Together, these technologies form a next-generation pricing research arsenal capable of constant market tuning through simulation, predictive optimization, and mass behavioral data harnessing. The future will see pricing evolve from point estimates to dynamically self-improving systems powered by tech. Exciting times ahead!


The key is leveraging frontier tools like VR, AI, and AR behavioral tracking to create cutting-edge pricing capabilities that surpass traditional methods. This fusion promises unprecedented predictive power and optimization at scale.


Research Magnifies Pricing Impact


Proper application of analytics introduces scientific rigor into an area historically guided by intuition and guesswork.


Just as research transformed marketing and product development practices through customer insight, pricing is ripe for similar disruption. With advanced methods unlocking multi-million-dollar revenue opportunities, pricing research merits investment by any data-driven organization!

141 views0 comments


bottom of page