Back in the ’80s, we started to track Revenue Management practices, or later called Yield Management, Price optimization. To optimize the financial result, dynamic pricing was introduced in several industries progressively. Nonetheless, for decades, customer demand anticipation or price discrimination practices were on a single unit of goods concept. Only when we got access to high calculating computing power, groups of units optimization was introduced, taking into account not a single unit of product but a group of units for financial optimization. It was either the “willingness to pay” profile discrimination or the cannibalization effect for similar units.
Optimization and silo effect
Broadly Price optimization can be described as the use of analytics, which helps to predict the behavior of customers, so that product availability and price can be optimized to generate the maximum amount of revenue possible, or volume of unit sold or profit. That was and remains the main principle of any Pricing strategy. For many years, analysts, managers, category managers calculated all needed price elasticity and seasonality for each of their units and took conclusions without envisioning the side effect on a similar product. This led to a trunk vision and false expectation on the predicted performance of their actions. It was correct at the unit level but not at the company level, in terms of expected performance. Now, we are finally able to include side effects or cannibalization effects in more complex than ever calculations during the optimization process. It is not the right price for a specific customer typology at the right time and place that counts but the right combination of thousands of prices among a group of similar products, if not millions. A more global Price vision is now possible, which leads to accurate predictions on any price decisions on company KPIs and performance. This is true whatever Pricing Strategy adopted by any company. (Profit maximization, Revenue improvement, or market share objectives) You can play with any growth driver.
“Now, we are finally able to include side effects or cannibalization effects in more complex than ever calculations during the optimization process.”
Current price // Promotion price
Promotion is the most popular price action to stimulate the market and generate incremental sales. Each promotional action has been analyzed, one by one, on discounted products only regarding the incremental product’s sold volume, revenue, or end profit. That was and is a major mistake, all industries have made for decades. Not considering side-effect on similar products, just leads to demand displacement, customer confusion, and potentially opposite global effect. 2008 financial crisis’s reaction was a clear example of mismanagement and lack of trust in their Revenue Management team and substantial holistic vision for many corporations worldwide. It began manifest that promotion, as well as current price, have an immediate effect but also unwanted side-effects that need proper understanding and analysis. Yes, a holistic approach is more than needed, it is mandatory to ensure the company to have a correct predictable effect of any price action on the market. Cannibalization is a major part of the price optimization process.
“It began manifest that promotion, as well as current price, have an immediate effect but also unwanted side-effects that need proper understanding and analysis.”
Yieldigo Price optimization solution, designed for retailers, takes seriously all cannibalization, side-effects in all its optimization process, for current price or promotion module optimization. It is at the heart of the global performance prediction for current price optimization and a key element of the promotion module – the decision support module.
Your strategy can be based on incremental market share (volume), turnover improvement (revenue), or financial performance (profit), Yieldigo Price Optimization SAAS solution will help you with any price changes action with a broader vision, considering all cannibalization effects.
Joachim Ignace – Yieldigo Marketing Manager