SherbyNet - /page/wikibook/entry.mu

Micron Document

<!DOCTYPE html>

<title>Price optimization</title>

</head>

Price optimization

</h1>

</header>

Price optimization is the use of <a href="Mathematical_model" title="Mathematical model">mathematical analysis</a> by a company to determine how customers will respond to different prices for its products and services through different channels and is in contrast to <a href="Market_value" title="Market value">market value</a>.<a href="#cite_note-pr-1">[1]</a> It is also used to determine the prices that the company determines will best meet its objectives such as maximizing <a href="Earnings_before_interest_and_taxes" title="Earnings before interest and taxes">operating profit</a>.<a href="#cite_note-pr-1">[1]</a> The <a href="Data" title="Data">data</a> used in price optimization can include survey data, operating costs, inventories, and historic prices and sales.<a href="#cite_note-nyt-2">[2]</a> Price optimization practice has been implemented in industries including retail, banking, airlines, casinos, hotels, car rental, cruise lines and insurance industries.<a href="#cite_note-sas-3">[3]</a><a href="#cite_note-nyt2-4">[4]</a><a href="#cite_note-wsjm-5">[5]</a><a href="#cite_note-wsj2-6">[6]</a>

<div class="mw-heading mw-heading2"><h2 id="Overview">Overview</h2></div>

Price optimization utilizes <a href="Data_analysis" title="Data analysis">data analysis</a> 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 <a href="Survey_methodology" title="Survey methodology">survey data</a> (e.g. such as in a <a href="Conjoint_analysis" title="Conjoint analysis">conjoint</a> pricing analysis<a href="#cite_note-7">[7]</a>) or <a href="Raw_data" title="Raw data">raw data</a> (e.g. such as in a <a href="Behavioral_analytics" title="Behavioral analytics">behavioral analysis</a> leveraging '<a href="Big_data" title="Big data">big data</a>' <a href="#cite_note-wsj1-8">[8]</a><a href="#cite_note-9">[9]</a>). Companies use price optimization models to determine pricing structures for initial pricing, promotional pricing and discount pricing.<a href="#cite_note-bain-10">[10]</a>

Market simulators are often used to simulate the choices people make to predict how demand varies at different price points.<a href="#cite_note-11">[11]</a> This data can be combined with cost and inventory levels to develop a profitable price point for that product or service.<a href="#cite_note-12">[12]</a> 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.<a href="#cite_note-bain-10">[10]</a>

Price optimization starts with a <a href="Market_segmentation" title="Market segmentation">segmentation</a> of customers. A seller then estimates how customers in different segments will respond to different prices offered through different channels.<a href="#cite_note-13">[13]</a> Given this information, determining the prices that best meet corporate goals can be formulated and solved as a constrained optimization process.<a href="#cite_note-pr-1">[1]</a><a href="#cite_note-gvr1-14">[14]</a> The form of the optimization is determined by the underlying structure of the pricing problem.<a href="#cite_note-pr-1">[1]</a><a href="#cite_note-gvr1-14">[14]</a>

If capacity is constrained and perishable and customer <a href="Willingness_to_pay" title="Willingness to pay">willingness-to-pay</a> increases over time, then the underlying problem is classified as a <a href="Yield_management" title="Yield management">yield management</a> or <a href="Revenue_management" title="Revenue management">revenue management</a> problem.<a href="#cite_note-pr-1">[1]</a><a href="#cite_note-gvr1-14">[14]</a> If capacity is constrained and perishable and customer willingness-to-pay decreases over time, then the underlying problem is one of <a href="Price_markdown" title="Price markdown">markdown</a> 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.<a href="#cite_note-pr-1">[1]</a><a href="#cite_note-gvr1-14">[14]</a>

<div class="mw-heading mw-heading2"><h2 id="Price_optimization_software">Price optimization software</h2></div>

/* start https://en.wikipedia.org/ */

.mw-parser-output .ambox{border:1px solid #a2a9b1;border-left:10px solid #36c;background-color:#fbfbfb;box-sizing:border-box}.mw-parser-output .ambox+link+.ambox,.mw-parser-output .ambox+link+style+.ambox,.mw-parser-output .ambox+link+link+.ambox,.mw-parser-output .ambox+.mw-empty-elt+link+.ambox,.mw-parser-output .ambox+.mw-empty-elt+link+style+.ambox,.mw-parser-output .ambox+.mw-empty-elt+link+link+.ambox{margin-top:-1px}html body.mediawiki .mw-parser-output .ambox.mbox-small-left{margin:4px 1em 4px 0;overflow:hidden;width:238px;border-collapse:collapse;font-size:88%;line-height:1.25em}.mw-parser-output .ambox-speedy{border-left:10px solid #b32424;background-color:#fee7e6}.mw-parser-output .ambox-delete{border-left:10px solid #b32424}.mw-parser-output .ambox-content{border-left:10px solid #f28500}.mw-parser-output .ambox-style{border-left:10px solid #fc3}.mw-parser-output .ambox-move{border-left:10px solid #9932cc}.mw-parser-output .ambox-protection{border-left:10px solid #a2a9b1}.mw-parser-output .ambox .mbox-text{border:none;padding:0.25em 0.5em;width:100%}.mw-parser-output .ambox .mbox-image{border:none;padding:2px 0 2px 0.5em;text-align:center}.mw-parser-output .ambox .mbox-imageright{border:none;padding:2px 0.5em 2px 0;text-align:center}.mw-parser-output .ambox .mbox-empty-cell{border:none;padding:0;width:1px}.mw-parser-output .ambox .mbox-image-div{width:52px}@media(min-width:720px){.mw-parser-output .ambox{margin:0 10%}}@media print{body.ns-0 .mw-parser-output .ambox{display:none!important}}

/* end https://en.wikipedia.org/ */

</style>

Price optimization software is an example of <a href="Business_software" title="Business software">business software</a> available to companies to support key business functions. Software companies have developed price optimization software packages to handle complex calculations. Companies have tailored these to meet the needs of <a href="B2C" class="mw-redirect" title="B2C">B2C</a> organizations, such as retail, or <a href="Business-to-business" title="Business-to-business">B2B</a> companies, such as those who require more complex quoting. Another common use of pricing software and pricing systems is for companies, both B2C and B2B, with a large number of products/articles sold in a wide range countries using different currencies and with commercial arrangements. Here, the complexity of combinations and permutations is an example of a big data solution where the seller can create central pricing strategies that then can be applied and executed across the organization. A further development of pricing software, especially in B2B companies, is to integrate this with software that configures larger, customized systems and solutions, and then also to integrate this with software that transforms the configuration and resulting price into a customer offer/quotation. The combination of configuration, pricing and quoting solutions is abbreviated to <a href="Configure_Price_Quote" class="mw-redirect" title="Configure Price Quote">CPQ</a> solutions.

Retailers and CPGs increasingly use AI-driven pricing tools to reduce execution errors, improve loyalty, and better align pricing with demand. These tools can model demand elasticity, run predictive price scenarios, and connect pricing with other key business functions like product data, promotions, and assortment planning.<a href="#cite_note-15">[15]</a>

Manfred Krafft and Murali K. Mantrala discuss the use of price optimization software in the retail industry and the paradigm shift from price optimization to pricing process improvement in their book Retailing in the 21st Century: Current and Future Trends, published in 2006. The book mentions that the research conducted on price optimization by its traditional definition is not applicable to the retail industry, and they recommend retailers adopt a process view of pricing.<a href="#cite_note-retail-16">[16]</a>

<ul><li><a href="Market_value" title="Market value">Market value</a></li>

<li><a href="Market_price" class="mw-redirect" title="Market price">Market price</a></li></ul>

<div class="mw-heading mw-heading2"><h2 id="References">References</h2></div>

/* start https://en.wikipedia.org/ */

.mw-parser-output .reflist{margin-bottom:0.5em;list-style-type:decimal}@media screen{.mw-parser-output .reflist{font-size:90%}}.mw-parser-output .reflist .references{font-size:100%;margin-bottom:0;list-style-type:inherit}.mw-parser-output .reflist-columns-2{column-width:30em}.mw-parser-output .reflist-columns-3{column-width:25em}.mw-parser-output .reflist-columns{margin-top:0.3em}.mw-parser-output .reflist-columns ol{margin-top:0}.mw-parser-output .reflist-columns li{page-break-inside:avoid;break-inside:avoid-column}.mw-parser-output .reflist-upper-alpha{list-style-type:upper-alpha}.mw-parser-output .reflist-upper-roman{list-style-type:upper-roman}.mw-parser-output .reflist-lower-alpha{list-style-type:lower-alpha}.mw-parser-output .reflist-lower-greek{list-style-type:lower-greek}.mw-parser-output .reflist-lower-roman{list-style-type:lower-roman}

/* end https://en.wikipedia.org/ */

</style><div class="reflist">

/* start https://en.wikipedia.org/ */

.mw-parser-output cite.citation{font-style:inherit;word-wrap:break-word}.mw-parser-output .citation q{quotes:"\"""\"""'""'"}.mw-parser-output .citation:target{background-color:rgba(0,127,255,0.133)}.mw-parser-output .id-lock-free.id-lock-free a{background:url("./mw/Lock-green.svg")right 0.1em center/9px no-repeat}.mw-parser-output .id-lock-limited.id-lock-limited a,.mw-parser-output .id-lock-registration.id-lock-registration a{background:url("./mw/Lock-gray-alt-2.svg")right 0.1em center/9px no-repeat}.mw-parser-output .id-lock-subscription.id-lock-subscription a{background:url("./mw/Lock-red-alt-2.svg")right 0.1em center/9px no-repeat}.mw-parser-output .cs1-ws-icon a{background:url("./mw/Wikisource-logo.svg")right 0.1em center/12px no-repeat}body:not(.skin-timeless):not(.skin-minerva) .mw-parser-output .id-lock-free a,body:not(.skin-timeless):not(.skin-minerva) .mw-parser-output .id-lock-limited a,body:not(.skin-timeless):not(.skin-minerva) .mw-parser-output .id-lock-registration a,body:not(.skin-timeless):not(.skin-minerva) .mw-parser-output .id-lock-subscription a,body:not(.skin-timeless):not(.skin-minerva) .mw-parser-output .cs1-ws-icon a{background-size:contain;padding:0 1em 0 0}.mw-parser-output .cs1-code{color:inherit;background:inherit;border:none;padding:inherit}.mw-parser-output .cs1-hidden-error{display:none;color:var(--color-error,#d33)}.mw-parser-output .cs1-visible-error{color:var(--color-error,#d33)}.mw-parser-output .cs1-maint{display:none;color:#085;margin-left:0.3em}.mw-parser-output .cs1-kern-left{padding-left:0.2em}.mw-parser-output .cs1-kern-right{padding-right:0.2em}.mw-parser-output .citation .mw-selflink{font-weight:inherit}@media screen{.mw-parser-output .cs1-format{font-size:95%}html.skin-theme-clientpref-night .mw-parser-output .cs1-maint{color:#18911f}}@media screen and (prefers-color-scheme:dark){html.skin-theme-clientpref-os .mw-parser-output .cs1-maint{color:#18911f}}

/* end https://en.wikipedia.org/ */

</style><cite id="CITEREFPhillips2005" class="citation book cs1">Phillips, Robert L. (2005). Pricing and Revenue Optimization. Stanford, CA: Stanford University Press. p. 35. <a href="ISBN_(identifier)" class="mw-redirect" title="ISBN (identifier)">ISBN</a> <bdi>9780804746984</bdi>.</cite>

</li>

<li id="cite_note-nyt-2"><a href="#cite_ref-nyt_2-0">^</a> <cite id="CITEREFAlina_Tugend2014" class="citation web cs1">Alina Tugend (April 8, 2014). <a rel="nofollow" class="external text" href="https://www.nytimes.com/2014/04/19/your-money/as-data-about-drivers-proliferates-auto-insurers-look-to-adjust-rates.html?_r=0">"As data about drivers proliferates, auto insurers look to adjust rates"</a>. The New York Times. Retrieved July 7, 2015.</cite>

</li>

<li id="cite_note-sas-3"><a href="#cite_ref-sas_3-0">^</a> <cite id="CITEREFAlex_Dietz2012" class="citation web cs1">Alex Dietz (September 6, 2012). <a rel="nofollow" class="external text" href="http://blogs.sas.com/content/hospitality/2012/09/06/revenue-management-vs-price-optimization-part-two/">"Revenue management vs. price optimization:part two"</a>. SAS. Retrieved July 7, 2015.</cite>

</li>

<li id="cite_note-nyt2-4"><a href="#cite_ref-nyt2_4-0">^</a> <cite id="CITEREFBob_Tedeschi2002" class="citation web cs1">Bob Tedeschi (September 2, 2002). <a rel="nofollow" class="external text" href="https://www.nytimes.com/2002/09/02/technology/02ECOM.html">"Scientifically priced retail goods"</a>. The New York Times. Retrieved July 7, 2015.</cite>

</li>

<li id="cite_note-wsjm-5"><a href="#cite_ref-wsjm_5-0">^</a> <cite id="CITEREFAnne_Kadet2008" class="citation web cs1">Anne Kadet (May 2008). <a rel="nofollow" class="external text" href="https://web.archive.org/web/20150707110752/http://revenueanalytics.com/wp-content/uploads/2014/03/SmartMoneyPriceProfiling.pdf">"Price profiling"</a> (PDF). The Wall Street Journal Magazine. Archived from <a rel="nofollow" class="external text" href="http://revenueanalytics.com/wp-content/uploads/2014/03/SmartMoneyPriceProfiling.pdf">the original</a> (PDF) on 2015-07-07. Retrieved July 7, 2015.</cite>

</li>

<li id="cite_note-wsj2-6"><a href="#cite_ref-wsj2_6-0">^</a> <cite id="CITEREFKim_S._Nash2015" class="citation web cs1">Kim S. Nash (April 30, 2015). <a rel="nofollow" class="external text" href="https://blogs.wsj.com/cio/2015/04/30/carnival-strategy-chief-bets-that-big-data-will-optimize-prices/">"Carnival strategy chief bets that big data will optimize prices"</a>. The Wall Street Journal. Retrieved July 7, 2015.</cite>

</li>

<li id="cite_note-7"><a href="#cite_ref-7">^</a> <cite id="CITEREFSmallwood1991" class="citation web cs1">Smallwood, Richard (October 1, 1991). <a rel="nofollow" class="external text" href="https://www.quirks.com/articles/data-use-using-conjoint-analysis-for-price-optimization">"Using conjoint analysis for price optimization"</a>. Quirk's Marketing Research Review. Retrieved September 27, 2018.</cite>

</li>

<li id="cite_note-wsj1-8"><a href="#cite_ref-wsj1_8-0">^</a> <cite id="CITEREFLeslie_Scism2015" class="citation web cs1">Leslie Scism (February 20, 2015). <a rel="nofollow" class="external text" href="https://blogs.wsj.com/moneybeat/2015/02/20/loyalty-to-your-car-insurer-may-cost-you/">"Loyalty to your car insurer may cost you"</a>. The Wall Street Journal. Retrieved July 7, 2015.</cite>

</li>

<li id="cite_note-9"><a href="#cite_ref-9">^</a> <cite id="CITEREFPerakis2016" class="citation web cs1">Perakis, Georgia (2016-07-25). <a rel="nofollow" class="external text" href="https://www.huffingtonpost.com/entry/a-revolutionary-model-to-optimize-promotion-pricing_us_579638bee4b0e002a313c6da">"A Revolutionary Model To Optimize Promotion Pricing"</a>. Huffington Post. Retrieved 2018-10-01.</cite>

</li>

<li id="cite_note-bain-10">^ <a href="#cite_ref-bain_10-0">a</a> <a href="#cite_ref-bain_10-1">b</a> <cite class="citation web cs1"><a rel="nofollow" class="external text" href="http://www.bain.com/publications/articles/management-tools-price-optimization-models.aspx">"Price optimization models"</a>. Bain & Company. June 10, 2015. Retrieved July 7, 2015.</cite>

</li>

<li id="cite_note-11"><a href="#cite_ref-11">^</a> <cite class="citation news cs1"><a rel="nofollow" class="external text" href="https://www.infosurv.com/how-a-discrete-choice-simulator-can-be-used-to-launch-the-right-product-part-2/">"Use Discrete Choice Simulator to Launch the Right Product | Infosurv"</a>. Infosurv. 2012-08-03. Retrieved 2018-09-27.</cite>

</li>

<li id="cite_note-12"><a href="#cite_ref-12">^</a> Arie Shpanya (2015), <a rel="nofollow" class="external text" href="https://econsultancy.com/blog/66483-test-until-your-price-is-the-best/,">"Test Until Your Price is the Best"</a>

</li>

<li id="cite_note-13"><a href="#cite_ref-13">^</a> Arie Shpanya (2014), <a rel="nofollow" class="external text" href="https://econsultancy.com/blog/65840-there-s-no-such-thing-as-one-right-price-in-retail,">"There's No Such Thing As One Right Price in Retail"</a>

</li>

<li id="cite_note-gvr1-14">^ <a href="#cite_ref-gvr1_14-0">a</a> <a href="#cite_ref-gvr1_14-1">b</a> <a href="#cite_ref-gvr1_14-2">c</a> <a href="#cite_ref-gvr1_14-3">d</a> <cite id="CITEREFÖzerPhillips2012" class="citation book cs1">Özer, Özalp; Phillips, Robert (2012). Models of Demand" in The Oxford Handbook of Pricing Management. Oxford University Press. <a href="ISBN_(identifier)" class="mw-redirect" title="ISBN (identifier)">ISBN</a> <bdi>978-0-19-954317-5</bdi>.</cite>

</li>

<li id="cite_note-15"><a href="#cite_ref-15">^</a> <cite id="CITEREFBarach2024" class="citation web cs1">Barach, David (2024-10-23). <a rel="nofollow" class="external text" href="https://www.mytotalretail.com/article/no-more-disconnects-how-modern-pricing-tools-can-build-customer-loyalty-through-unified-data-and-analytics/">"How Modern Pricing Tools Can Build Shopper Loyalty"</a>. Total Retail. Retrieved 2025-07-18.</cite>

</li>

<li id="cite_note-retail-16"><a href="#cite_ref-retail_16-0">^</a> <cite id="CITEREFKrafftMantrala2006" class="citation book cs1">Krafft, Manfred; Mantrala, Murali K. (2006). Retailing in the 21st Century: Current and Future Trends. Germany: Springer Berlin. <a href="ISBN_(identifier)" class="mw-redirect" title="ISBN (identifier)">ISBN</a> <bdi>9780804746984</bdi>.</cite>

</li>

</ol></div></div></div><div><div class="zim-footer">

This article is issued from <a class="external text" title="Last edited on 2025-07-18" href="https://en.wikipedia.org/wiki/?title=Price_optimization&oldid=1301199208">Wikipedia</a>. The text is available under <a class="external text" href="https://creativecommons.org/licenses/by-sa/4.0/deed.en">Creative Commons Attribution-Share Alike 4.0</a> unless otherwise noted. Additional terms may apply for the media files.

</div>

</div></div>

</div>

</main>

</div>

</body></html>