Commercial and pricing analysis is the science of understanding the relationship between price and demand across product and customer segments, relative price position within your market and the relative value of product features.
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Imagine, for example, a car insurer. Car insurance is an extremely competitive market in the UK. Margins are wafer thin, acquisition costs are high and the market is flooded with promotional “noise”. To create a growth business in an environment like this, where there is not a great deal of margin left to turn into price cuts, it is important to analyse price elasticity (the change in demand per change in price) and the relative values of price cuts vs. product benefits.
An insurer that lacks analytic capability may feel that lowering their premium is their only lever, or may blindly load product features in the hope that it adds value and stimulates demand. The insurer that is backed by analysis will understand the non-linear relationship between price and demand, that a free courtesy car is equivalent to a 5% premium discount at a cost of £20 and free breakdown cover is equivalent to a 10% discount at a cost of £15. Furthermore, they will understand how these figures vary by customer segment, and what the long term profit breakeven points are for these segments. Accordingly, they will be able to build an optimised pricing and product design strategy to maximise profitability across all product and customer segments.
Competitor analysis is an extremely important part of this kind of strategic business analysis. The above example is an optimisation problem, and optimisation relies on having a complete model of the world, including its constraints. Without understanding your businesses relative position in the market, and including that into your model, you may identify an optimal price point that makes you 10% more expensive than your largest competitor and hence unlikely to win the business.
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