Part 2 – What-If analysis usecases – Pricing

In part 1 of the series, we covered some of the key aspects of What-If analysis when applied to financial analysis. Pricing is an equally important use case, as probably nothing matters more to the profitability of a business than the price it is selling the products or services at. There are plenty of market forces at play (external factors) as well as the many internal factors that impact the cost to produce the product or service. So, it is easy to see why this as an extension to the financial analysis. The objective of applying What-If analysis is to identify the right price that doesn’t negatively impact the top line while trying to maximise the bottom line.

Tracking Trends

With data feeds on competitor pricing, various consumer price indices (macroeconomic trends), internal customer surveys and general trends in consumer spending, analysts can build a detailed model of What-If impacts on the pricing. The ability to mash-up multiple data sources to build a consolidated model is an important option for this use-case.

Collaboration is also needed here, as pricing involves feedback from multiple stakeholders from different departments across the organisation. The ability for every business user to clone a What-If scenario and play around in an analytical sandbox would be a very useful feature.

Agility is key here

Pricing involves a combination of human psychology and a detailed understanding of various business factors. A rigid IT driven process can impact efficiency here, as Pricing Analysts need the flexibility to experiment with various input factors to understand the impact of buying behaviour.

It is quite obvious that pricing analysts prefer to work with spreadsheets as well like Finance Analysts, given the agility of the tool to plugin multiple data sources and create a dynamic model without taking too much time of IT. But, this could also create dependency on key staff, which could be a problem, especially in case of seasonal variation in demand such as in airlines and travel sector. Imagine the impact on the business, if a pricing spreadsheet is not updated on time due to unavailability of staff. Many websites are still updated with prices that take data feeds from spreadsheet models (yes, even in 2016!).

Pre-packaged vs Bespoke

There are plenty of pre-packaged applications available for the pricing domain. As with any domain specific solution, we need to look at how easily it would fit in with the existing data sources and also how flexible is to change in the future. While there is no one size fits all solution, it may be a futile exercise to re-invent the wheel.

At DataQuarks, we are keen on building a cross-functional analytics platform that could be used by multiple department for their respective business problems with minimal change and extra spend. Spreadsheets (Excel) as well are widely used across the organisation. Getting adoption and buy-in for a solution that can be used by everyone would therefore be easier.

Summary

Similar to finance, this is an area where there is a very strong need for What-If analysis to effectively improve the profits. Start with the process and not technology, build sample What-If scenario models and roll out to see how management interacts with them to take smarter decisions. Rest will follow by itself!

 

Image Source – PYO Prices by Victoria Reay on Flickr