Price Optimization - What Can I Expect Out of My Investment
Published on: Mar 4, 2016
Transcripts - Price Optimization - What Can I Expect Out of My Investment
Price Optimization: What should I expect out of my investment?
You’ve decided to improve your ability to drive customer demand through a focused pricing approach.
You’ve investigated price optimization systems so that you can determine prices that will sell the most
product while yielding a fair profit for you. You’ve
made a good choice. Today’s customer looks for
value which doesn’t necessarily equate to low
price. Offering your products at the right price
point is a key to enriching the total customer
shopping experience. Although your goal is to
elevate the customer’s shopping experience, your
internal expectations include realizing a
reasonable return on the investment. So, what should you expect for your investment?
First, let’s focus on what you should expect in average returns for your hard earned investment. Secondly,
we will look at returns when using a “best practices approach”.
Average ROI for Price Optimization Systems
Before you make the decision to invest in price optimization technology, an evaluation to determine the
financial viability of the project should be performed. Ensuring an acceptable return requires due
diligence and research, including an analysis of time based potential cash inflows and outflows. One such
measurement, called a return on investment (“ROI”), analyzes the internal rate of return (“IRR”), the net
present value (“NPV”), and the payback period. Additionally, a profit/loss statement can then be created
to understand the overall effect on profitability.
Industry research, provided by RSR (1)
, indicates that using base price optimization software results in
1.0%-3.0% sales and 2.0%-5.0% margin improvements. Based on this industry average, what would be
your return on investment? For comparison purposes, I am assuming a 10 store retailer with annual total
sales of $250,000 per week per store, investing in a SaaS product costing $100,000 per year and an
investment in pricing personnel of $150,000 per year. An 18.0% hurdle, 4.0% incremental other expense
and 5.0% incremental labor rate is used for this analysis. Based on this improvement range, one would
expect to realize the following ROI metrics:
IRR = 32.1% to 188.7%
NPV = $ 306,300 to $ 1,573,100
Payback Period (months) = 17.0 to 9.5
Companies should jump at the chance to create an investment that would provide such high returns. But,
why stop there? Why not ask how you can surpass these industry standards and set the curve for
There are two principal ingredients in creating massive success using price optimization techniques - a
great system and the right pricing philosophy. Best practices would dictate that both the system and
strategies employed should be anchored by what the customer is telling you through their buying
behaviors. Once you’re committed to setting the curve, what can you expect as a return on your
First, and foremost, is to procure a great system that will allow you “make sense” of the mass amounts of
data. My experience with Revionics Life Cycle Price Optimization solutions has always resulted in above
average returns. This system has the ability to analyze consumer behaviors, set strategies at various levels
within the product hierarchy and models out the impacts of strategy choices before you implement them
as some of the many features.
The next step includes developing strategies that take advantage of consumer buying behaviors. My
technique of choice bridges retailer goals to the consumer buying behaviors of your customer. This
process results in highly correlated success in driving key performance measures including product
demand, increases in consumer shopping satisfaction, and gross margins. Additionally, it is flexible
enough to allow development of goals that are specific to different customer behavioral groups or
clusters. For example, you may want to drive customer traffic and sales improvements in one group of
stores while focusing on margin improvements in another group.
Here are results from projects that I have performed. These are not aberrations, but represent typical
results from implementations using this combination of system and technique.
Project A Project B
IRR = 220.1% 280.5%
NPV = $ 1,865,000 $ 2,450,400
Payback Period (months) = 9.0 8.5
The Bottom Line
Choosing to make price optimization a part of your on-going improvement of the customer shopping
experience will result in impressive returns. However, using best systems and practices can dramatically
boost the effectiveness of your pricing process, drive customers to your stores, increase profitability, and
enhance customer satisfaction in much greater fashion. Now go forth, putting your best foot forward and
enjoy the fruits of your journey to pricing excellence.
(1) – RSR, Calculating The Value Of Lifecycle Price Optimization, Nikki Baird and Brian Kilcourse, Managing Partners, August 2014
Article written by Mark Kelso, Founder and Managing Partner at Price Revolution, LLC. Mark Kelso is a price optimization expert,
who, in 2011, created a unique consumer focused strategy development process that has resulted in substantial improvements
in retailer’s key performance measures. Retailers using this targeted technique have enjoyed dramatic increases in revenue,
profitability and consumer demand for their products.
Price Revolution, LLC is a retail price revenue solutions company, enriching the customer’s shopping experience through
focused pricing. Price Revolution provides retail price strategy and price management services.
Visit Price Revolution at www.price-revolution.com