When you’re looking for ways to accurately forecast the impact of a mass price change, the key is precision in your data and analysis, your pricing strategy and process.
On one end of the spectrum, you have the most basic forecasting methods; on the other end, you’re applying segmentation that offers greater granularity and precision. In between these extremes, there’s a continuum of increasingly sophisticated forecasting techniques.
Your organization’s capacity for this precision depends on the sophistication of your pricing software and the maturity of your infrastructure.
Getting Started: The Macro-Level Forecast
The most basic approach is the macro-level forecast. Since it’s relatively easy, this technique is available to organizations that don’t have a pricing team; it could be used effectively by your sales or marketing teams, for example.
When you announce a three-percent price increase across the board, you’re forecasting a simple uplift to business. You’re saying that profitability is 18 percent today, and tomorrow it will be 21 percent, due to this 3 percent increase in revenue.
All you need to come up with a high-level estimate are a few lines in a spreadsheet with some gross assumptions. Strictly speaking, you don’t even need pricing software. But there are several ways to add nuance to this approach. For example, if your procurement or supply chain organization is putting together cost increase estimates for the next year, you could layer that into your forecast.
Unfortunately, this type of forecasting doesn’t give you a good idea of what to expect when you implement a general price change. It’s only useful for companies that aren’t yet ready to apply full segmentation, full precision and timing elasticity.
There are many more sophisticated techniques that could be used in conjunction with a price increase to try to predict the outcome. Even the broadest segmentation improves the precision of your forecast. If you have different prices for the U.S. and Europe, for instance, you could factor in a weighted average based on the amount of revenue you’re expecting in those regions.
For example, if it makes sense for your business, you may choose to use pricing software to run all sorts of price elasticity analyses. If you have market share data, you might want to know how much your price changes are going to affect your share of the market. If you have a good handle on industry-wide trends and believe the market is going to grow by 4 percent, you want your growth to exceed that.
Even with the latest pricing optimization software, there’s still a strategic need for companies to perform and announce mass price changes. But rather than making these changes in one fell swoop, it’s best to take a more tactical approach, updating pricing at different times of the year across different customer segments. At the end of the day, you’re only able to use the forecasting techniques supported by your current system.
To learn more about how pricing software helps you manage price changes in days rather than months, download our complimentary e-book, Forecasting The Impact Of Mass Price Changes On Profits.