Knowing your business value directly depends on knowing the power of your pricing performance. Keeping that in mind, let’s take a closer look at ways of measuring your pricing performance to determine how to understand your business value.
According to McKinsey, conversation market price tests have become obsolete.
It happened because the existing market changes are rapid, and the practice cannot keep up with them. Besides, the retail industry has witnessed a drop in consumer incomes because of the ongoing economic downturn, which means challenges in increasing sales and promoting revenues.
At this point, pricing performance has become as important as ever. Without further ado, let’s find out the ins and outs of pricing performance to help your business keep up with market changes.
The Challenging Story of Pricing Performance
When understanding pricing performance, one cannot omit the price-performance ratio. It is a factor used in economics as well as engineering. It helps measure the product’s ability to perform, considering its cost and price tag.
At this point, a lower price-performance ratio makes a particular product more attractive. Yet, when it comes to pricing and category management, there is a different take on pricing performance along with the price-performance ratio.
Let’s start from the beginning. The price is a single variable that distinctly impacts all the key KPIs. And it is true for any given business out there. It means the better you can handle the price, your KPIs will be better.
In addition, price is the factor affecting your revenue streams and sales. Any retail business has a particular portfolio. In turn, each given item within the portfolio has its price tag. Putting all together, the sum of all prices within the portfolio comprises your profit margin.
Remember that it is virtually impossible to predict future sales and revenue based on your ongoing business activities.
It is true because the nature of a price is multifactorial, which means a myriad of factors is involved. However, with proper price analysis software, the story can be different. Something that was previously hard and challenging can become easy and beneficial.
Don’t Perceive Costs as a Silver Bullet
Often, retailers use cost-based pricing to promote their business at the early stages of development. This approach measures price performance within the scope of a gained margin.
The authors of this book suggest that measuring price against a cost is “more of a reflection of how well the standard was established than of how wisely the buyers (i.e., retailers) are using the company’s financial resources.”
In other words, a retail business can be found caught up in standard calculations resulting in an inaccurate price performance measurement.
Within the context of the scenario presented above, it is also crucial to take into account the Price Index Indicator. This variable helps calculate all the given price increases and decreases within a particular period of time.
Respectively, it all leads to a perspective on the average value needed for accurate price performance evaluation. Yet, one still needs to remember that even with a Price Index Indicator, one does not receive a highly precise price performance measurement.
Especially if the calculation is done in a turbulent market with many variables.
The Potency of a Pricing Strategy
At this point, you can see that measuring pricing performance is a phenomenon coming with different variables.
One can even say that the concept is multifactorial. It includes the aspect of pricing as well as pricing efficiency. Regardless of the phenomenon’s complexity, it is crucial to ask the correct question, starting with specific goals and objectives set and achieved within a particular period.
Next, proceed with a pricing strategy and appeal to the clear measurement process linked to the given strategies associated with the retailer’s portfolio. Here are various advantages of disadvantages of different pricing strategies you can use.
Learning from different approaches is important for presenting an accurate tool for measuring price performance. At the moment, when knowing how a good pricing strategy creates a strong foundation for measuring price performance, it is time to take a deeper dive into the process itself.
Ins and Outs of Measuring Pricing Performance
At the moment, you understand the importance of setting proper goals and objectives, implementing pricing strategies within the scope of different products in the portfolio, and knowing the complexity of the approach.
Besides, with all these aspects put together, there is also a factor of rapid market shifts and economic downturns.
In the past, managers used good old Excel sheets and constructed performance-measuring approaches with as many variables as possible.
Next, all the sheets, graphs, and charts were put together to get a broader perspective on the method. In addition, when the retailer’s portfolio and sales grew, the price performance process became even more complicated.
In short, all the calculations heavily relied on qualitative and quantitative data.
However, with modern analytical tools entering the market, everything has changed. In reality, almost everything. While the calculations still rely on qualitative and quantitative data, the instruments for collecting, analyzing, and processing it have evolved drastically.
In such a case, to use an advanced pricing analytic instrument, follow these steps:
- The system collects data from different sources and starts processing it. The data can originate from sales, competitors, and marketing.
- The user sets particular parameters and variables to start a measurement.
- The system engages in root-cause analysis and result measurement. It leads to a broader perspective on pricing performance and price. Wrapping all the insights together, the system presents a user with reports suggesting the next pricing steps.
These three steps present the just of how modern advanced pricing analytics tools measure pricing performance.
The Bottom Line
It is apparent that measuring pricing performance is a challenging task. The phenomenon is multifactorial and should be understood through a range of variables it entails. Besides, there is always a factor of changing market conditions and shifts.
Yet, taking into consideration all the above, modern advanced analytics tools make pricing measurement easy and seamless. Respectively, as a user, you need to choose the right software tool and insert the correct variables, and the machine will do the rest.