The Impact of Pricing on Sales

I've seen countless companies relying on outdated models or gut instincts for price changes. That often leads to tactical, knee-jerk pricing, missed profits, or constant battles to justify pricing & promotional plans to supply chain partners. I just recorded a quick video explaining exactly how we combine four different approaches to model elasticity accurately: 1. Double Machine Learning (DML) - Delivers a robust causal estimate by predicting sales and price from confounders, then regressing the residuals. - We typically build one DML model per SKU. In our experience, this often reflects real-world behavior best. 2. Log-Log regression models - It is simple and interpretable - perfect if you have lots of historical data, a high volume of transactions, or price variation. - The log price coefficient directly translates to elasticity. It is quick to implement, though it often oversimplifies and is not a good method for B2B. 3. ElasticNet - A regularized linear model balancing Lasso and Ridge methods. - If you have many variables, such as our promos, competitor promos, distribution, comp distribution, etc., it helps prevent overfitting. 4. Random Forest - Handles non-linearities pretty well without having to do complex data engineering. - We use price perturbation, simulating different price points to see how predicted demand changes, thus estimating implied elasticities. In the video, I also share how we compare the four methods, track metrics like RMSE or MAPE, and deliver scenario-based recommendations about price, promotions, and competitive moves, helping you go from reactive to proactive pricing. The real payoff is that you can: 1. Proactively manage pricing: estimate the impact of competitor actions and optimize your strategy. 2. Maximize promotional ROI: estimate what truly drives incremental volume vs. what's wasted spend. 3. Earn insights-backed credibility: support your pricing with robust elasticity metrics that show retailers how you got to your recommendations. I'd love to hear your thoughts. If you're ready to take a deeper look at these elasticity models (complete with a whitepaper, sample code, and practical examples), check out the comment section for links and more details!

One of my most rewarding projects involved a client who was struggling to increase sales despite having a strong product offering. After a thorough analysis of their pricing strategy, I identified a few key areas for improvement. Firstly, the client was offering too many discounts and promotions, which diluted the perceived value of their products. To address this, I recommended reducing the frequency of discounts and focusing on creating a more premium perception. Secondly, the pricing structure was overly complex, making it difficult for customers to compare products and make informed decisions. We simplified the pricing tiers and introduced a clear value proposition for each option. Finally, we adjusted the pricing based on market research and customer feedback. By understanding the competitive landscape and the customers' willingness to pay, we were able to optimize the prices to maximize revenue. These changes resulted in a significant increase in sales, with a 40% boost in revenue within the first quarter. The client was thrilled with the results and has continued to see positive growth. How have you been able to optimize your pricing strategy to increase sales? What factors do you consider when making pricing decisions?

Discounting is like salt: a little enhances the dish, too much ruins the meal. Yet, too many companies treat discounting as their go-to move. Sales slowing down? Discount. Tough negotiation? Discount. Want to hit quota? You get a discount! You get a discount! Everyone gets a discount! 🕺 And just like that, your pricing strategy turns into an all-you-can-eat buffet. The kind where customers pile on the value but only want to pay for the breadsticks. The damage? You train customers to wait for a sale. If they know you’ll cave, why would they ever pay full price? You attract price-first buyers. The moment a competitor offers a better deal, they’re gone. No loyalty, no second thoughts. You devalue your own product. If you’re constantly slashing prices, you’re telling the market your solution isn’t worth what’s on the price tag. And then comes renewal season, where you try to claw your way back to normal pricing...only to find customers pushing back. “Why would I pay more for the same thing?” Discounting isn’t evil. Used strategically, it can drive volume, accelerate deals, or reward loyalty. But if it becomes your default lever? You’re not selling on value - you’re running a clearance rack. Long-term success comes from pricing discipline. Sell on impact, not just affordability. Defend your value. And remember: The best customers don’t buy because you’re the cheapest. They buy because you’re the best.

Target made two major announcements this week that underscore the vital importance of getting pricing strategy right. This morning, the retailer said that comparable sales declined by 3.7% in the first quarter of 2024, while its gross margin rose by 140 basis points year on year. Those financial results follow Monday’s announcement that Target will cut prices on 5,000 popular items, including major national brands as well as its own brands. To reinforce the overall message and guide consumers to the savings, Target will communicate the lower prices at shelf with prominent red tags. While some consumers will certainly welcome the lower prices after the cumulative effects of more than two years of high inflation, succeeding with these price cuts is not as simple as it appears. Beyond whether the math will work sufficiently to reverse the sales decline, the cuts will have effects on the power dynamics in the sector as well as on Target’s own price image. Measuring success starts with the fact that Target, like most retailers, plays two pricing games simultaneously. It plays the Power Game in its interactions with major CPG companies and plays the Uniform Game day-to-day in its individual stores. Two tenets of the Power Game are the preservation of balance of power and the importance of game theory, because every deal between a retailer and a supplier has a direct or indirect effect on other relationships. How will CPG companies support Target’s price-cutting efforts? Some may be reluctant, because their other retail partners may demand similar levels of support, potentially igniting a downward price spiral. Other CPG companies may look for adjustments to trade terms instead of prices, as we described in last week’s 𝘎𝘢𝘮𝘦 𝘊𝘩𝘢𝘯𝘨𝘦𝘳 𝘯𝘦𝘸𝘴𝘭𝘦𝘵𝘵𝘦𝘳. Then there are the consumers themselves. An article this week from Vox (see the link in the comments) shows that some segments of US consumers continue to spend, despite high interest rates and persistently high inflation. Winning the Uniform Game requires a deep knowledge of price elasticities, and Target is betting that the lower prices will be sufficient either to lure more consumers or drive higher volumes as consumers stock up for the summer and for upcoming holidays. But these gains will need to offset the foregone revenue from customers who would have paid the previous prices anyway. The lower prices also raise the question of how well Target can own a lower-price positioning in a market where Walmart, Aldi, and Costco have built their entire business models around a low-price premise. Winning with price cuts is rarely as easy as it seems on the surface. It will be interesting to see how this decision works out for Target. https://lnkd.in/gk4Y4zyG