Price optimization is the use of

mathematical analysis Analysis is the branch of mathematics dealing with continuous functions, limit (mathematics), limits, and related theories, such as Derivative, differentiation, Integral, integration, measure (mathematics), measure, infinite sequences, series (m ...

by a company to determine how customers will respond to different prices for its products and services through different channels. It is also used to determine the prices that the company determines will best meet its objectives such as maximizing

operating profit In accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profit that includes all incomes and expenses (operating and non-operating) except interest expenses and income tax expenses. Operating income and ope ...

. The

data In the pursuit of knowledge, data (; ) is a collection of discrete Value_(semiotics), values that convey information, describing quantity, qualitative property, quality, fact, statistics, other basic units of meaning, or simply sequences of sy ...

used in price optimization can include survey data, operating costs, inventories, and historic prices & sales. Price optimization practice has been implemented in industries including retail, banking, airlines, casinos, hotels, car rental, cruise lines and insurance industries.

Overview

Price optimization utilizes data analysis to predict the behavior of potential buyers to different prices of a product or service. Depending on the type of methodology being implemented, the analysis may leverage

survey data Survey methodology is "the study of survey methods". As a field of applied statistics concentrating on human-research surveys, survey methodology studies the sampling of individual units from a population and associated techniques of survey da ...

(e.g. such as in a

conjoint {{Unreferenced, date=December 2009 The conjoint was a basic medical qualification in the United Kingdom administered by the United Examining Board. It is now no longer awarded. The Conjoint Board was superseded in 1994 by the United Examining Board ...

pricing analysis) or

raw data Raw data, also known as primary data, are ''data'' (e.g., numbers, instrument readings, figures, etc.) collected from a source. In the context of examinations, the raw data might be described as a raw score (after test scores). If a scientist ...

(e.g. such as in a behavioral analysis leveraging 'big data' ). Companies use price optimization models to determine pricing structures for initial pricing, promotional pricing and discount pricing. Market simulators are often used to simulate the choices people make to predict how demand varies at different price points. This data can be combined with cost and inventory levels to develop a profitable price point for that product or service. This model is also used to evaluate pricing for different customer segments by simulating how targeted customers will respond to price changes with data-driven scenarios. Price optimization starts with a segmentation of customers. A seller then estimates how customers in different segments will respond to different prices offered through different channels.Arie Shpanya (2014
"There's No Such Thing As One Right Price in Retail"
/ref> Given this information, determining the prices that best meet corporate goals can be formulated and solved as a constrained optimization process. The form of the optimization is determined by the underlying structure of the pricing problem. If capacity is constrained and perishable and customer willingness-to-pay increases over time, then the underlying problem is classified as a

yield management Yield management is a variable pricing strategy, based on understanding, anticipating and influencing consumer behavior in order to maximize revenue or profits from a fixed, time-limited resource (such as airline seats or hotel room reservations ...

revenue management Revenue management is the application of disciplined analytics that predict consumer behaviour at the micro-market levels and optimize product availability, leveraging price elasticity to maximize revenue growth and thereby, profit. The primary ...

problem. If capacity is constrained and perishable and customer willingness-to-pay decreases over time, then the underlying problem is one of

markdown Markdown is a lightweight markup language for creating formatted text using a plain-text editor. John Gruber and Aaron Swartz created Markdown in 2004 as a markup language that is appealing to human readers in its source code form. Markdown i ...

management. If capacity is not constrained and prices cannot be tailored to the characteristics of a particular customer, then the problem is one of list-pricing. If prices can be tailored to the characteristics of an arriving customer then the underlying problem is sometimes called customized pricing.

References

{{Reflist Fundamental analysis Pricing