For many years, the science of price elasticity measurement was a solution in search of a problem. At the same time, traditional revenue management was a science with a relatively narrow appeal among airlines, hotels and similar businesses. Elasticity analytics and revenue management have now intersected in the form of price optimization, driven by real-time competitor data available via automated price shopping. It can work within a much wider range of industries than those traditional travel niches and is a key method to deal with the extreme price transparency created by the Internet and mobile devices everywhere. Best of all, it allows any business to gain an understanding of its true competitors, rather than relying on a few preconceived notions of who the competitors might be. Bill Kotrba, VP of Industry Strategy for JDA Software explains.

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The Data-Driven Pricing Strategy
Common Sense and the Latest Technology Unite to Drive
Business Performance
By Bill Kotrba, Vice President of Industry Strategy at JDA Soft ware
and Pelin Pekgun-Cakmak, visiting professor at Georgia Tech Universit y
S queezed between savvy customers and cutthroat
competitors ready to go to war over prices, businesses
today face a new reality of pricing transparency.
No matter the industry, the pressure on price levels
remains unprecedented, and it isn’t going to let up
anytime soon.
Just as businesses began to grasp how Internet search
engines put comparison shopping a click away, mobile
devices changed the game all over again. The Internet
made it possible for customers to instantly find the
lowest prices — and now with mobile devices, the
lowest prices can instantly find customers. Mobile and
social media alerting have turned price transparency
into price hyper-transparency.
If businesses aren’t careful about being sucked into
the pricing hype, they may do serious damage to
their own profit margins by unnecessarily matching a
competitor’s unrealistic price. But price transparency is
here to stay, and organizations cannot afford to ignore
competitors’ rates when setting their own. So, how
can companies survive this high-wire balancing act
without resorting to blindly matching every price in
the marketplace?
To turn transparency from a threat into an opportunity,
organizations must take a data-driven approach to
identify and consider the right competitors at any
given time. This requires putting aside gut-feel and
preconceptions — and taking a more disciplined,
quantitative approach that measures customer
responses to price changes, competitors’ price
changes, competitive attributes and recurring patterns
like seasonal trends.

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relative to a full-service competitor down the street.
A quantitative comparison revealed that the economy
property did not need to price as low as it had been to win
business away from the fancier property.
Creating a comp set starts by examining the attributes of a
potential competitor’s products or services and identifying
those that most closely align with the company’s own
offering. In the case of hospitality, this might include
location, amenities such as a swimming pool or furnishings,
customer service and so on.
One of the common approaches for identifying a comp
set based on attributes is score-based benchmarking1.
Starting with a company’s own property as a reference
point, assigned a baseline score of zero, the potential
competitor’s individual attributes are then scored with
positive or negative values. For example, if the competition
has a swimming pool and the baseline company does not,
then the competitor might be assigned a “+2” score in
that category. Conversely, if the competitor does not have
Developing the Right Competitor Set turndown service and the baseline company does, the
Not all competitors are created equal. Nothing throws more competitor might receive a “-2” score. Add all the attributive
money down the drain than price matching against an scores for each competitor, and those competitors whose
organization that is not a true competitor. Unfortunately, total scores come closest to zero are those who best align
identifying “true” competitors can be a real challenge as candidates for the attribute-based comp set.
when comparing historical price and sales data against
conventional “wisdom” within an organization. An attribute-based comp set can also be described as a
“comparable set,” i.e., properties share the same traits and
Comparing known market shares and revenue results to a operate similarly2. However, the key to deriving an accurate
company’s own historical price data will often show that a comp set is identifying the closest substitutable option
competitor thought to be significant actually has very little from the customer’s perspective. This provides a more
impact on market share or influence on product demand. nuanced and accurate comparison matrix as opposed to
The bigger the gap between what gut-feel identifies as simply sorting competitors into broad categories such
the competition and what the data says to refute that as “economy” or “luxury” based on product attributes. In
assessment, the more important it is that a company start a recent hospitality study by Cornell University, a cluster
listening to the numbers. A wrong choice can lead to analysis of the average daily rate (ADR) of properties in one
costly pricing decisions down the line and missed revenue urban area in the U.S. has revealed that upscale properties
opportunities. That’s why the development of an accurate were directly competing with economy properties due to
competitor set, or comp set, is fundamental. And by the discrepancy between their intended product type and
utilizing publicly available price information captured from customer perception on their competitive position. This
the Web, it’s also become easier. When properly quantified, study further alludes to the fact that identifying the correct
an accurate comp set is the key to identifying a business’ comp set should consider not only product attributes but
own optimal price and can enable advanced software tools also pricing and demand patterns3.
like price optimization. Price optimization can find the
pricing “sweet spot” by identifying opportunities to price
above or below the competition and ultimately generate
the most revenue.
1
“Revenue Management, A Business Process Approach” by V. Edwards, Alberta
Developing the comp set in a systematic manner can Hospitality; “Harnessing the power of value proposition” by P. Mayock,
HotelNewsNow.com, April 2010.
decrease common pricing mistakes that result from 2
“Do you have the right comp set?” by G. Hartmann, HotelNewsNow.com,
following conventional wisdom or gut feel. For example, June 2010.
JDA Software has encountered hospitality clients with 3
“Product Tiers and ADR Clusters: Integrating Two Methods for Determining
economy properties that were excessively under-pricing Hotel Competitive Sets” by J. Kim and L. Canina (2009), Cornell Hospitality
Report, Vol. 9, No.14.

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Market Reference Price is Key properties due to an added service or a better location.
It is possible to calculate a specific price differential and
Traditionally, pricing decisions were almost always still evaluate the two competitors. For example, strength
based on what customers were willing to pay in the past, positioning enables a company to factor in that a specific
combined with comparisons to local competitors. Hyper- competitor is commonly $50 more than its own rate,
transparency has changed all of that. As the competitors’ so before computing the market reference price, that
prices fluctuate more rapidly than ever, a company must competitor’s rate is adjusted down by $50 to make the
be nimble enough to change with them — or not change properties comparable. By doing so, the comp set can
at all if that is what an optimal pricing strategy dictates. continue to be refined for more accurate results, as this
Accomplishing this requires both an accurate comp set will often change the mix of competitors.
and an estimation of customers’ willingness to pay given
the prices that the comp set is charging, which we refer Strength positioning isn’t the only special factor that must
to as the market reference price. This price represents the be considered while developing the market reference
prevailing comparison point that customers have in mind price. In industries such as hospitality and transportation,
when weighing alternative choices and prices. seasonal changes may also affect the competitor set — and
therefore the market reference price. In these cases, it is
A market reference price, based on an accurate comp set, critical that a company analyze price-shop trends based on
is a critical input to the process of identifying the price that season, which may include weekday vs. weekend patterns,
generates maximum revenue and profit. Fortunately, this to statistically identify which competitors have pricing
is where transparency and e-commerce make this process strategies most similar to the company’s own and adjust
easier than it used to be. Screen-scraping tools available comp sets accordingly. Without making those adjustments,
from companies like Rubicon Group, QL2 Software, the company is likely to make incorrect pricing conclusions
RateGain, etc., collect automated price shops from the throughout the ebb and flow of the year.
Internet making it easy to gather competitor pricing and
effectively establish a market reference price at specific
points in time. For example, a digital picture frame may
It Starts With Clean Data
have a list price of $149, but if four competitors price it While automated Internet price shops have certainly
at $140, $136, $134 and $130, respectively, a customer’s provided a significant amount of intelligence upon
perception of the product price would be on average which to make informed decisions, it is important to
$136. In this case, the market reference price can be also remember not to follow this data blindly. Very often
estimated as $136. screen-scraped prices will need to be cleaned up based on
a number of factors. For example, there may be holes in
A market reference price should take into account the the data when there is no available product or service for
dynamic nature of prices over time, comparing the price a particular price shop. If a hospitality competitor sells out
of a service or product across alternatives, and ultimately of rooms on a certain date, then there is nothing to base
offering insight into the elasticity of demand (i.e., demand assumptions upon. In these cases, it is crucial to create
measured as a function of a company’s own prices and viable assumptions to algorithmically fill in these gaps as
simultaneous competitor prices for comparable products accurately as possible.
or services).
In other instances, there may be pricing outliers that
Strength Positioning and Seasonality decisions should not be based upon. These include deep
discounts or statistically erratic prices. In those instances, it
In most instances, calculating a market reference price is also pays to have logic built into the system that can scrub
rarely as simple as the case of the digital picture frame. the data so it doesn’t skew the results.
While making these comparisons and refining comp sets,
often a stronger or weaker competitor might still stand
as a substitutable option in the customers’ eyes. These
“We’ll Match Any Price – Unless Our
competitors may be better or worse than the baseline Elasticity Models Say We Shouldn’t”
company in one or more characteristics. These attributes
It’s not a great marketing slogan, but it is an extremely
can be associated with a certain price differential to
valuable business practice. Armed with a properly quantified
adjust the competitors’ prices when calculating a market
competitive set and the latest price optimization technology,
reference price using strength positioning.
a company can learn which prices and competitors are
relevant and which ones can be ignored.
Returning to the hospitality example, suppose there are
several factors that create a differential between two

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When a company stops chasing those irrelevant competitors, About JDA Software Group, Inc.
it will also stop leaving money on the table. This extra
money in the cash register is a direct reflection of the real JDA® Software Group, Inc. (NASDAQ: JDAS), The Supply
results that come from this new competitive posture. Chain Company®, is a leading provider of innovative supply
chain management, merchandising and pricing excellence
By understanding the correct set of real competitors in solutions. JDA empowers more than 6,000 companies of all
a specific market, automated price shops can provide sizes to make optimal decisions that improve profitability
a market reference price — a point of comparison that and achieve real results in the discrete and process
enables revenue-maximizing responses to changes in manufacturing, wholesale distribution, transportation,
competitor prices. The question is no longer how much to retail and services industries. With an integrated solutions
charge, but how much to charge relative to the measured offering that spans the entire supply chain from materials
comp set given the elasticity of demand and a number to the consumer, JDA leverages the powerful heritage
of other factors such as demand forecasts, remaining and knowledge capital of acquired market leaders
inventory, business rules, etc. including i2 Technologies®, Manugistics®, E3®, Intactix®
and Arthur®. JDA’s multiple service options, delivered via
For many years, the science of price elasticity measurement the JDA® Private Cloud, provide customers with flexible
was a solution in search of a problem. At the same configurations, rapid time-to-value, lower total cost of
time, traditional revenue management was a science ownership and 24/7 functional and technical support and
with a relatively narrow appeal among airlines, hotels expertise.
and similar businesses. Elasticity analytics and revenue
management have now intersected in the form of price
optimization, driven by real-time competitor data available
via automated price shopping. It can work within a much
wider range of industries than those traditional travel
niches and is a key method to deal with the extreme price
Bill Kotrba serves
transparency created by the Internet and mobile devices as vice president of
everywhere. Best of all, it allows any business to gain an industry strategy
understanding of its true competitors, rather than relying in JDA Software’s
on a few preconceived notions of who the competitors Pricing and Revenue
might be. Management Group.
He is responsible for
overseeing strategic
About JDA Pricing and Revenue business initiatives for the leisure travel
Management Group and hospitality industries.
JDA Pricing and Revenue Management Group, a global
business unit within JDA Software, is a leading provider
of Price Sensitive Revenue Management™ solutions that
help companies improve profits by balancing supply
and demand through innovative forecasting, pricing and
revenue management. For more than 25 years, companies Pelin Pekgun-Cakmak
in the travel, transportation, hospitality and media is a Visiting Assistant
industries have benefited from the ongoing innovation Professor in the H.
and deep domain expertise from JDA. To learn more about Milton Stewart School
of Industrial and
JDA Pricing and Revenue Management, please visit
Systems Engineering
www.jda.com/revenuemanagement. at Georgia Institute of
Technology.
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