The Making Data Work Blog

The Future of Revenue Management: Elastic Pricing Using Analytics

[fa icon="calendar"] 23-Aug-2018 15:30:00 / by Robert Bramwell

Robert Bramwell

The Importance Of Pricing:

Pricing your goods & services right is essential to making a business profitable. It affects every element of the sales cycle, from attracting customers to sealing deals. Even so, many companies make these decisions from gut feeling or on the back of a napkin at best . Such a crucial element of business success can't be left to chance in today's environment so what if it were possible to predict exactly the right price to maximise your revenue? The answer lies with data. 
Many companies by now have the ability to do the customer 360 view: what ages, demographics and places people are buying their products, but for most this capability is limited. This information alone isn't usually enough to make informed strategic decisions about making better revenue. 

3D dollar tree with hundred dollar bills Isolated over whiteThe Problem:
Let's say you wanted to introduce a discount to sell leftover stock, or maybe to attract new customers to your service. On your website you give everyone the same discount because you don't know which customer segments will respond to an offer.

  1. What about your regular customers who'd have bought within that time frame anyway? You'll lose the difference in revenue between the usual price and offer price for those customers.

  2. What if the discount fails to attract enough new customers to make the loss of your usual revenue worth it? 

In this situation your company is worse off by introducing the offer, it spectacularly fails and you lose your job. That might be an exaggeration(!) but what can you do to resolve this issue? 

We at CDO Partners strongly believe that using data is the secret sauce to making business more effective, efficient and beneficial for all parties. Much of the work we do focuses on integrating & enriching data to present new insights, and this case is no different. 

Having done the work to integrate your CRM, website analytics and sales records, you'll have the ability to see at the transaction level who bought, their address, what they've bought in the past, the price & quantity amongst other things. It's this data that we can use to model the price elasticity of demand which effectively tells us how much the quantity sold changes in response to changes in price. 

It is this model which allows us to price our products such that on average, we'd expect to sell exactly the amount of stock we have available, and sell it at the price that maximises revenue to the company. 

Using this algorithm you are also able to see which portions of your market are more price sensitive, and whether that portion will respond significantly to discounts. It breaks down the responsiveness to price changes by including variables that are available in your data and produces a price-responsiveness coefficient for each one, independent of all the other variables present.

This model will allow you to inspect your demand and tailor your products to address each segment of the market - maybe a particular segment will benefit from a lower-end product, or maybe you could investigate introducing a more luxury offering. 

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We've developed this solution through working with Italian travel company Alpitour where we analysed transaction-level data enriched with CRM and developed the models in Alteryx. It's a workflow that you can run regularly whenever there is an update to the data, and we can extend it so that you can create a calculator to find the price elasticity for a sub-group of individuals, or even estimate a price elasticity for a single individual. If Alteryx isn't your thing, the model boils down to a simple formula so it can be instantiated in virtually any other platform you desire. 

CDO Partners primarily use the technologies provided by our partners Tableau, Alteryx, Looker & Squirro, but our focus is on applying value-focused data solutions for firms  and supporting analytic capability using a flexible approach to tools and technology. We have the ability to adapt our solutions to your analytics platform with consultants trained in agile and a broad spectrum of expertise, from data science, to database architecture, to visualisation. 

For more information or to submit a ticket for our flexible Tableau & Analytics consulting service, click below: 

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Topics: Agile, 2018, "alteryx", Customer Service, Revenue