How a price waterfall can help increase your profit margin
05/23/2023 - Pricing strategy
The price waterfall analysis method makes it possible to identify weaknesses in an eCommerce pricing strategy that the company could improve in the medium and long term. This results in more effective and profitable prices for the company, i.e., prices that deliver higher profit margins. Pricing can be a complex process, especially with extensive product catalogues. Therefore, resources such as price waterfalls can help improve day-to-day decision-making and optimize final prices. We explain how below.
Make consistent price changes based on your historical data
One of the challenges brands and retailers face, especially during inflation, is the tendency to increase retail prices or list prices significantly to cope with cost increases or competitors’ price changes. However, increasing prices across the catalogue without analyzing opportunities and threats may affect users’ willingness to pay. It could also drive away customers — which would also hit the profit margin.
The alternative option is to use a price waterfall to identify the transactions and products incurring the highest costs. Then apply small changes that will affect the company’s overall profitability. With this visual representation, you can check the profit margin each product delivers and apply price changes based on this information. Regular data analysis will provide a solid data history that you can rely on for future decisions. It will help you to consistently adapt prices to market fluctuations.
Small price changes can make a big difference
A market index study found that even minor price changes can significantly increase profits. They concluded that increasing prices by 1% can result in an 11% increase in operating profits. While reducing prices by 1% would make profits fall by 11%. The simplest or most obvious changes are not always the most effective. You should use a tailored data study to determine the most effective strategy for your business. A price waterfall will highlight the weaknesses in your pricing strategy so that you can fix them.
Manage your pricing strategy with pricing software
Once you have identified the weaknesses in your pricing strategy, it is time to act and change prices. You can use repricing software to analyze your prices and those of your competitors. It then applies changes based on advanced pricing rules. These rules will come from the knowledge gleaned from the price waterfall, your data history, and your business goals. For example, it is possible to set rules to ensure that new prices always maintain the same profit margin.
The most advanced tools, such as Reactev, have self-learning capabilities, thanks to their AI engine. This will help refine price recommendations to deliver better and better results. It can even set prices tailored to target markets to boost demand and consumer loyalty.
Category: Pricing strategy
