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What is Price Optimization?

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  • Written By: Keith Koons
  • Edited By: Lauren Fritsky
  • Last Modified Date: 06 November 2016
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    Conjecture Corporation
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Price optimization is nothing more than the process of determining the proper retail value of a consumer product or service. While in principle, it may seem that there is not a whole lot to consider, both manufacturers and retail stores dedicate a massive amount of time towards price optimization to ensure that their products will sell quickly while still making a profit. If the item is priced too high, it may not sell at all, while if the cost is reduced too much, the store will unnecessarily limit its buying power. Each of the manufacturers use a price optimization formula based on the overall demand for their product, their level of competition, and the cost of manufacturing their goods.

For example, a grocery store may carry six different types of canned tomatoes. While each of these brands may be comparative in terms of overall quality, manufacturers will set their price optimization based on their image with consumers. A few of the canned tomatoes on supermarket shelves may be 20 to 30% more than the generic brands, while the value brands are constantly dropping their prices in order to remain the least expensive brand within the location. Finding the perfect balance between profit and value is essentially what price optimization strives to do, and because the relative values of goods and services constantly change, this is a never-ending task for most businesses.

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It is impossible to obtain a proper price optimization without evaluating all three aspects of the formula, because within any geographical area, the standards may be entirely different for other places in which the product is sold. If a consumer was to call a repairman on a weekday, for example, the quoted price would be much less than if the same services were requested on the weekend or a holiday. Stores without a large amount of competition can also adjust their price optimization upwards, while franchises in large cities normally have to set their prices much lower in order to entice customers to enter their storefronts.

Another important aspect of price optimization would be the overall sales volume of a particular business. While many specialty stores will only aim to make a few high-profit sales per week, others will attempt to complete thousands of transactions in order to generate revenue. If a certain price optimization point fails to entice consumers to purchase the product, retailers may be tempted to drastically cut the sales amount in order to sell many of those items quickly. On the other hand, when consumers are naturally drawn to a product and it is in demand, businesses keep the price high in order to make as much profit as possible. There are merits in both sales philosophies, and the consumer ultimately decides what price optimization point is considered fair by her everyday spending habits.

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