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Am I Losing Money by Discounting?

Varun Daga
Posted 8/20/18
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As a consumer, who doesn't like a discount, right? Discounting is one of the most common and powerful techniques used in consumer-based businesses to lure back lost customers and to maximize revenues after a successful sales season. But with great power comes great responsibility.  How do you know what products to discount, when to discount, and by how much? Often (and it's scary to think) that these decisions are made using gut-feel and randomness.  If you are not careful, these decisions could cost your organization hundreds of thousands of dollars!  With so much money at stake, instinct or gut-feeling is not an acceptable approach. Discounting decisions need to be made scientifically and backed by data using machine learning and predictive analytics.

The first step to intelligent discounting is to determine the reason why you are discounting. The three most common reasons for temporary price reductions are: to receive a short-term cash flow, to get rid of slow moving (or excess) inventory, or to compete with rivals. Regardless of the motive, you want to make sure you are discounting with a purpose.

Let's take the example of "getting rid of inventory". If a $30 product were priced at $1, it would certainly sell out (this assumes there is some value in the product). Of course, you would take a huge loss. What if you knew that customers would pay as much as $20 for the product and you would still sell all the inventory? The more lucrative and optimized move is to discount the product to $20.

Given this scenario, the hypothetical best price to meet your goal of "getting rid of inventory" and to maximize revenue would be $20. So, how do you determine this optimal price? That is where a machine learning promotional pricing model comes in!

Whatever business goal you hope to achieve by discounting, machine learning promotional pricing models will greatly improve your ability to achieve it without sacrificing profitability. These models leverage the power of artificial intelligence and predictive analytics to incorporate the effects of many additional factors, such as competitive pricing, cannibalization and seasonality into the discount optimization. We can run multiple competing models in parallel to come up with the best discount level. This ensures accuracy that far surpasses the gut-feeling methodology. With the right amount of discount, we don't leave money on the table by charging less than we should.

I bet I know what you are thinking-if these discount pricing models have all the answers, why isn't everyone using them? The main reason is because it takes a lot of experience and effort to set these models up. Before applying a model, you have to identify and design the right metrics needed to represent all of the other factors that impact the amount of discount.

While I am a big fan of DIY efforts, there are some projects that require professionals, this is one of them! To ensure that you are realizing the most revenue and margin from your discount initiatives, contact Dunn Solutions today!

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