This client was looking for hierarchical price optimization strategy – combining the heterogeneity of individual countries, and aggregation at the region level at the same time. This would help them define and achieve revenue goals at both – country and region level. A simulator would allow them to test out different scenarios. The solution needed to be scoped for country level elasticities and simulation for aggregated region level sales goal.
Self service simulation for different pricing tactics
Product elasticity, cross product elasticity, and product lifecycle allowed us to estimate the impact of changing pricing levers with greater certainty
~2% (avg.) margin improvement across Top 5 brands
12%-17% improvement in forecast accuracy across Top 5 brands
6% reduction in inventory over 6-month observation period
The study enabled our client to constantly monitor business targets and review the pricing strategy based on quarterly performance
Pricing strategy & Optimization
A pricing strategy is a method to discover the best
price for a product. But finding the right price is not as simple as the definition sounds. The client was using competitive pricing strategy – focusing on the existing market price of competitors. They were not considering their own COGS, as their assumption was that the market is saturated, and it is better to focus on the price of competitor products.
They needed a better approach to pricing – one that
would maximize their profits and revenue. The client liked our approach of state space modeling to measure the stochastic components along with the use of multiplicative models to compute elasticities. To top it all, a self-service web-based pricing simulator would enable them to test out different pricing tactics
Improved revenue through strategy recommendations
Summary insights were fed into a dashboard that allowed simulation of pricing changes on contracts, recontracts and margin.
Final results were delivered through price elasticity dashboard. User inputs can be:
a. Target revenue
b. Desired margin
c. % changes in # of stores, among other factors
We overlaid business rules and constraints, competitive benchmark on top of elasticity based optimization.
High level business benefits include optimal markdown scenario, improved revenue & better liquidity. The client now creates benchmarks every quarter.