Optimization Types
- Mike Deskis
- Ioana Kocurova
When thinking about optimization there are several different paths to choose from:
Traditional
In a traditional price optimization application, the use of sophisticated mathematical analysis is used as a means to predict customer behavior based on historical transaction data. As an example, we might use a regression analysis, which is the measuring of impact of one variable on others, to determine the overall impact of competitor price changes on your company’s sales.
REGRESSION: In statistical modeling, regression analysis is a set of statistical processes for estimating the relationships between a dependent variable and one or more independent variables. Its definition comes from Latin term of regressus - to go back (to something). In that sense, regression is the technique that allows us "to go back" from messy, hard to interpret data, to a clearer and more meaningful model.
This analysis can be tailored to different customer segments by simulating how targeted customers will respond to price changes. Working in this way can provide multiple data-driven scenarios that provide in-depth forecasting through different channels.
Cost-Based
Manufacturers most commonly use this method of pricing, since it generally will require the least amount of information about customers and consumers. Overall, this is a simpler method that will consist of using the cost of creating the product plus the percent markup that is necessary.
Competitive Pricing
The competitive model is most often used in online retail scenarios, in this situation companies monitoring their competitor’s prices and then will generate their own price setting using all of the information gathered. Typically, this pricing method uses various pricing rules to ensure that the company’s price for a certain product reaches a certain position in the market (e.g. being the cheapest available).
Optimization Example
As an example, a traditional rule-based optimization strategy would a set of predetermined pricing rules. These pricing rules for a grocery store may include: mark up on all products in the “produce” category by 10%; reducing cereal brands in a marketing campaign by 15%; employing a 12% reduction in key-value items to equal the prices of a competitor; and adjusting all prices to end with 0.99.