Pricing Efficiency
Reviewed By Eyal Orgil -Published September 7, 2023
Table of Contents
What is Pricing Efficiency?
In business, pricing efficiency describes how effectively businesses execute procedures related to setting and optimizing product pricing. It’s about streamlining the approval and decision-making process, so pricing teams can get products to market more quickly and maximize their revenue potential.
Price optimization is a measure of how close market prices are to the theoretical equilibrium price that would exist if all factors in the market were accounted for. Pricing efficiency essentially gauges how well a company’s pricing strategy and internal processes reach that peak efficiency (and how quickly they accomplish it).
Its business definition is quite different from (though vaguely related to) the economic theory of pricing efficiency, which is more well-known. In economics, price efficiency is based on the idea that prices reflect the information available to all participants in the market. This theory suggests that markets are efficient because all relevant information that affects valuations is accessible to the public.
Synonym
- Price efficiency
Factors in Pricing Efficiency
Like every ‘efficiency’ measure, pricing efficiency is about identifying and delimiting areas of wasted time and effort in the pricing process. So factors affecting pricing efficiency are really just factors that impact the speed and accuracy with which an organization can make pricing decisions and set prices that reflect market value and demand.
Process Optimization
Pricing decisions actually comprise several smaller steps:
- Research and profitability analysis
- Assessing market value
- Examining competitor pricing
- Evaluating product differentiation (and whether pricing will play a role in that)
- Determining pricing model(s) and strategies
- Approval
- Ongoing assessment
Regardless of how much an organization leverages automation, each of these steps requires some manual effort. If it takes days to get a response from a key influencer or decision-maker, it’ll take weeks (or, in some cases, months) to even set the new price. By then, market conditions will probably have changed, and the organization will be left behind.
Price Determination
Because of the speed with which market forces shift, agility is the determining factor in pricing efficiency. Organizations must be able to assess competitors, market conditions and customer value quickly. They need to set a price that takes into account all available variables, but also accurately reflects demand, price elasticity, and ROI potential.
Pricing Data Analysis
Pricing data helps businesses understand what drives price changes. It gives them insights into market conditions, competitor activity, and customer dynamics (e.g., purchase behavior and product usage).
The more accurate and digestible a company’s data is, the faster they can make decisions using it and the more spot-on those decisions will be.
Pricing Strategy
A company’s pricing strategy takes into account customer buying trends, market conditions, and profitability goals. Most companies use a hybrid approach to pricing, combining multiple strategies. SaaS companies, for example, often use a mix of cost-plus, usage-based, and tiered models to create the perfect formula for each market segment.
A pricing strategy is the foundation for future decisions. Having one that is well-received by customers makes it a lot easier to optimize pricing in the future.
How to Achieve Pricing Efficiency
By optimizing pricing processes, companies can reduce time to market, improve their margins, and increase customer satisfaction. To achieve it, businesses need to streamline workflows, automate manual tasks, and take advantage of predictive analytics.
Data Collection and Management
Create a central hub to gather and store pricing data (e.g., a customer data platform and data warehouse). This could include pricing of other market participants, customer feedback, cost structures, and historical pricing data.
Utilize tools that can pull real-time market data, such as competitor price changes or shifts in demand. And regularly update and cleanse that data to ensure accuracy.
AI and Automation
Use machine learning models to forecast demand, customer behavior, and potential price points. And use analytics to simulate different pricing scenarios to predict potential outcomes.
Automating manual processes (e.g., customer segmentation, modeling) saves time and reduces errors. Automated pricing helps identify optimal prices without the need for manual intervention, freeing up resources to focus on strategy and high-value tasks.
When using automation tools to drive pricing efficiency, pay close attention to how certain price changes impact demand. Those insights will guide future pricing decisions.
Streamlined Approval Processes
Establish a clear hierarchy or workflow for pricing approvals. This ensures that price changes can be made swiftly without unnecessary bureaucratic delays. It’s best to use software to automate approval workflows, eliminating manual hand-offs and potential bottlenecks.
Cross-Functional Collaboration
Foster collaboration between sales, marketing, finance, production, and operations teams. A unified approach ensures that all factors, from production costs to promotional strategies, are considered in pricing decisions.
When evaluating your pricing strategy, hold regular meetings or sync-ups to discuss and align on pricing strategies and changes. And use a data platform that centralizes everything for everyone in the organization to access.
Feedback Loop Creation
Understanding the impact of pricing decisions and examining them retrospectively is the only way to reach price optimization. So you have to continuously gather feedback from customers regarding your pricing. By establishing feedback loops, businesses can get insights directly from the customers, understanding their perceptions and needs.
After implementing a pricing change, analyzing the fallout of pricing changes can offer invaluable lessons for the future, ensuring continuous improvement.
Impact of Sales Technology on Pricing Efficiency
Investing in dedicated pricing software can eliminate the manual aspects of many tasks associated with price management. If it weren’t for sales automation and data systems, achieving true pricing efficiency would be impossible.
Pricing Analytics
Pricing analytics involves all the activities associated with collecting, aggregating, and analyzing pricing data from all its sources. These include:
- Ecommerce platforms
- ERP
- CRM
- POS systems
- Customer portals
- Historical data
Businesses use pricing analytics to assess both the success of current pricing strategies and changes to pricing over time. When companies can visualize their pricing data in real-time, it improves pricing efficiency by enabling them to set or change prices more quickly.
Configure, Price, Quote (CPQ)
CPQ software simplifies product configuration and pricing. It allows sales teams to quickly create accurate quotes that include upsells, discounts, and optional add-ons.
For organizations selling complex products or services, CPQ can be a major time-saver. It eliminates the need for manual calculations, ensuring accuracy and consistency in all quotes.
Since CPQ is a core element of the sales process (and one of the only data sources for companies using quote-based pricing), it is essential for pricing efficiency. To maximize its impact, however, it needs to integrate with other sales systems, such as the CRM or ERP, to ensure seamless data flow and accuracy across the board.
Dynamic Pricing Software
The ability to change prices in response to real-time data is a game-changer. Automated tools make these adjustments seamless, ensuring that a business’s prices are always in tune with market conditions.
Dynamic pricing software not only helps businesses stay competitive, but also facilitates pricing experiments. Companies using it can make quick changes to certain prices and watch market reactions right away. And they can do so with relatively little risk.
Examples of Price Efficiency
Dynamic Pricing in Retail and Ecommerce
MAjor ecommerce sellers and retailers use big data and real-time analytics to instantly adjust their prices based on factors like demand, inventory levels, and competitor pricing. This allows them to capture maximal revenue from hot trends while quickly reducing prices on less popular items, ensuring minimal stock left over.
The best example of this is Amazon, which uses cookies to change its pricing every 10 minutes.
Tech Gadget Launch Pricing
Every time Apple, Oculus, or any major tech gadget company releases a cutting-edge new product, they set their launch prices using sophisticated algorithms. They consider heightened potential demand and limited accessibility over anything else.
They fully plan to reduce their prices over time once the hype dies down and their products become more commonplace. But they use price skimming to maximize their revenue potential during the initial launch phase.
The reason this facilitates efficient pricing processes for these companies is they’re already planning on bringing the price down. They can gradually reduce it until they reach an optimal figure, so they don’t need to spend too much time making pricing decisions after the first launch.
Airline Ticket Pricing
Airfare pricing is an example of complete pricing automation. Since airlines have a natural monopoly and are heavily subsidized by the government, they’re less concerned with outcompeting each other and turning the highest profit per customer. They primarily want to fill their planes and get people where they need to go.
That’s why airlines use complex algorithms that take into account various factors like demand, flight duration, layovers, seasonality, customer loyalty status, and more. They adjust prices up or down depending on the expected demand for a particular route. This enables them to maximize capacity and still make a decent profit.
People Also Ask
What is the difference between market price and efficient price?
In an efficient market, prices reflect all available information and perfectly represent the value of products or services. A market price, on the other hand, is simply the price at which a product is sold in any given market. It may not be based on fundamentals but still be influenced by external factors such as supply and demand.
Since nobody thinks the same, and people can’t (or won’t) all access the same information, every product operates in at least somewhat of an inefficient market. There are too many variables that affect price, making it hard to perfectly assess the value of a product.
What is the most efficient pricing strategy?
The most efficient pricing strategy depends on the individual business and its goals. Companies may choose to set prices based on things like cost-plus, competitor-based, or tiered pricing.
In theory, the most efficient pricing strategy is value-based pricing. It’s a method that considers a product’s unique value proposition and sets prices based on customer perception. It’s the most difficult to implement because it requires a deep understanding of the target market, but it’s also the most effective in terms of generating profits because customers are more likely to make a purchase and understand why it’s worth that price.