As a basic premise of self-interest, everyone wants to make good knowledgeable decisions,  and businesses aren’t any different from individuals. Thus, price optimization essentially allows businesses to make informed decisions that are founded on well-known customer, product, and market data. Therefore, with the accumulation of accurate data about their products and customers, instead of guesses, businesses can perfectly price their product or service to attract the interest of their customers and maximize sales and profitability. 

The ultimate objective of price optimization is to enable an organization to identify the perfect balance between business rules, numerous KPIs, price value drivers, pricing strategies and your pricing stages. 

Optimization History

The concepts of price optimization isn’t new and has been part of the marketplace since the very beginning. For as long as there have been marketplaces for trading and selling goods, the strategy of pricing has been at the forefront. Our predecessors have known about pricing based on demand, but the major difference is that they didn’t have the capacity to analyze all of the variables that impact prices.  

From the start of trading marketplaces, business owners have been applying simple strategies (ie.  standard mark up on cost) and foresight to predict demand and achieve their own KPIs. Auctions are one of the oldest marketplace forms that embrace these principles. However, the auction format had its drawbacks that can lead to dissatisfaction and market inefficiencies.

As a replacement for auctions, posted prices were introduced to eliminate the buyer or seller’s dissatisfaction and the inherent  inadequacies. This change enabled a fair price that was agreed upon in advance and allowed a greater number of people to enjoy the product and led to a more streamlined sales process and maximized profit from each transaction. 

Over time, trade evolved again as both marketplaces and the number of sellers expanded, allowing for more variety in products and improved economic welfare for everyone. But, even with these improvements most pricing was still based on intuition and imprecise guesswork.

Evolution of Optimization

A major evolution of the decision-making process includes the concept of price differentiation, because the optimal price is unique to an individual customer transaction, many sellers will differentiate their offers and their prices. 

The degree and magnitude of this price differentiation, whether it is a unique price per product, segment or personalization, can be very strategic. Additional factors like various regulations, market practices, and maturity of the pricing strategies are all fundamental to the process, and reflect the complexity of each pricing decision.

From these improvements, the concept of price optimization was born and as the available technology continues to expand, the ability and opportunity to predict trends and the impact of external factors (weather, seasonsonality, time, etc), can be better understood and strategies can be updated to increase profits.