Sales forecasting software to monitor profitability
Anyone who wants to know how to develop a good pricing strategy must understand that defining the selling prices of products and/or services alone is not enough.
Why is this? Because a company's profitability depends on a subtle combination of an adapted pricing strategy and a perfect control of operating expenses.
Indeed, sales prices must integrate production costs as well as a mark-up rate used to make a profit on the sale. But setting a high selling price because costs are not under control has an impact on sales.
This is why it is essential to equip yourself with sales forecasting software adapted to manage your margins well, thanks to the optimization of your costs (fixed and variable charges), and your revenues by determining the most effective pricing strategy to increase your sales.
Maîtriser ses coûts avec un logiciel de prévision des ventes
As we have explained, a good pricing strategy must integrate the company's fixed and variable budget into the selling price of its products and services, because the revenue generated must cover these costs in order not to generate losses. In addition, a mark-up (a rate defined by the company) must be added to this selling price as its commercial margin, in other words its profit.
There are two possible strategies for increasing the margin: either set a higher selling price or reduce the company's expenses.
Although the first solution may seem the simplest, it is not necessarily the most effective, since it can be a disincentive to purchase if the price is perceived as too high by customers. The company then loses the benefits of the price increase. Acceptability price and perceived value are two indicators that should not be neglected, as they reflect the price that a customer is willing to pay in consideration of the benefits and quality of the products or services offered.
Furthermore, setting higher sales prices to compensate for possibly too high costs is not a sustainable method in the long run, but a band-aid that will have to be removed sooner or later to heal the financial bleeding.
Thanks to machine learning and its super-powerful calculations taking into account many data that no other tool is able to digest, a sales forecasting software using artificial intelligence can improve the financial profitability of companies, such as:
- the analysis of the profitability of each sub-activity, service or product in order to abandon those that are not (or no longer) profitable enough or to renegotiate certain costs (such as the prices of supplier purchases);
- the detection of current or future trends allowing the company to adapt to its context as early as possible, which also contributes to a better management of inventories, an important expense item in a company (reducing surpluses to avoid losses and unsold products as well as storage costs, reducing the risk of stock shortages which are harmful to customer satisfaction and reduce possible sales and therefore revenues, etc.);
- optimizing its cash flow strategy (cash account), because the reduction of expenses associated with a good margin rate allows a gain in cash flow;
- understanding customer behavior, which is essential for the success of marketing actions (e.g. promotional sales) or the development of the company, such as the introduction of a new product or point of sale.
Elaborating sales forecasts with such a software allows to anticipate the demand and the customers' reactions, two important factors for the management of logistics and resources. In addition, it is a tool for analyzing historical data related to the company's past activity, facilitating the detection of one (or more) trends while having visibility on the various financial profitability indicators, such as margins and revenues generated globally or according to a specific action.
Finally, the simulations possible with a software equipped with artificial intelligence allow the company to observe the evolution of its margin and its turnover in real time according to many possible scenarios.
Define a good pricing strategy with a sales forecasting software
A company that has its costs under control therefore has more room to maneuver when developing its pricing strategy. Despite this, the determination of a pricing policy remains a complex step. The price of a product or service is the first criterion of choice of a customer, especially since he has now easy access to the competition's prices.
Moreover, proposing a price that is too low does not allow the benefits of the reduction in operating costs to be reaped and would commit the proof of the value of the product or service. On the other hand, a price that is too high is likely to drive customers away. The challenge for companies is to find the right price or to implement a permanent or temporary pricing strategy, such as:
- the margin strategy, which we have already discussed, the price is defined according to the cost price plus a margin rate;
- the pricing policy based on those of the competition (alignment of prices or lower prices);
- the skimming method, which consists of proposing a high price at the launch of a product and then lowering it later (mainly used in the high-tech sector);
- the penetration strategy, which consists of offering a low price in order to attract as many customers as possible;
- the bundling method, which consists of selling several products together at a lower price than if they were purchased separately;
The idea here is not to offer an accounting course, but to demonstrate the different choices for companies. Choosing the right pricing strategy is therefore a perilous exercise.
That's why working with a sales forecasting software is a precious help: it allows to simulate the effects of each strategy and even better, to mix several methods according to the product life cycle or the market evolution. This method of flexible price optimization (dynamic pricing) has a positive influence on sales since it allows to propose the right price according to several indicators.
Thus, establishing sales forecasts with an adapted software brings a greater visibility of the activity and its costs. Several levers allow to increase the turnover and the financial margin of companies. The optimization of operating costs is one of them, as it allows to reduce the cost of production and consequently to increase the financial margin. Because the cost price is lower, the company has more leeway on its pricing policy, which allows it to adjust its prices according to the market, the context, the customers' buying behavior, etc., and thus increase its sales and therefore its revenue.
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