Pricing is a core strategic component in retail, influencing not just
the company's profitability but also brand image and customer
experience. Blue Yonder Price Optimization automatically sets the
optimal prices to deliver the best bottom line without compromising
brand's promise to its consumers.
Price Optimization: Price optimization is the practice of using data on operating costs, inventories, and historic pricing and sales to come up with the price of an offering that will maximize profits. Understanding the customer and how they will react to a specific price point is of vital importance in price optimization.
Price optimization is at the root of the force needed for profit
generation in retail. The backbone of retail pricing analytics is
science, which is used to price items correctly without the need to
discount them.
Discounts aren’t working anymore.
The numbers of Nielsen Homescan,
regardless of which channel, showed the following after 52 weeks, the
last day being October 8th, 2016: “spend on offer” for brands such as
FMCG went down 40% from being 42% in 2015 and 44% the year before.
This is only one of many brands that follows suit. Zara
is also notorious for their lack of advertising. However, their shelves
are re-stocked as fast as in a couple of weeks from when the items were
first put out. Therefore, they just focus on producing what consumers
want, while using what they save on advertising to pay the higher rates
of work in Spain, which is another crucial aspect of the brand.
Picture this! Their sales don’t depend on discounts. With proper
forecasts, they’re able to make a supply chain that will be the most
beneficial to the business.
Pricing:
it’s one of the trickiest parts of online retail. Why? Well, not only
is pricing hard to get right the first time, but it is also difficult to
make sure it keeps up with the dynamic marketplace. Set it too high
and you could drive shoppers away. Set it too low and you leave
potential profit on the table, along with creating a customer base that
is used to deep discounts.
With that said, how do you determine the best price for each of your products at any given time?
The answer lies in data. There’s a good chance that you and your competitors have comparable inventories.
This means that if you’re missing an item that a shopper wants, they
could just click over to your competitor to get it all in one order.
Also, it means that their prices matter a lot. Shoppers love to compare prices, so your relative prices compared to your competitors’ are especially important.
Retailers are on to pricing optimization
Retailers worldwide are catching on to the fact that their prices are
relative, both when they set them and for the rest of the time that
they carry those products.
Most retailers (61%) plan to use a form of pricing optimization this
year. That was a big increase from the 36% of retailers who planned to
optimize their prices in 2013.
As big box retailers continue to have great success with repricing
their products in real-time based on market factors (also known as dynamic pricing),
all other retailers will continue to feel the pressure to implement a
form of pricing optimization that maximizes their sales and profit.
How to optimize pricing
1. Know your customers
You already have a lot of the data that you need to implement a
pricing optimization strategy. Who are your customers and how much are
they willing to spend? You can test the price elasticity of certain
products that you’re introducing to the market. Pinpoint your most
valuable customers and let their buying behavior influence your pricing.
2. Set a price floor
Before you get ahead of yourself, make sure that repricing will never
cut into your costs. Setting a minimum price puts you in control of
your pricing. Some other retailers, especially Amazon,
have the ability to consistently cut prices and operate even when they
are selling items below cost. Your price floor makes sure that you’ll
never do that--unless that’s a part of your strategy.
3. A/B test pricing
Once you decide the lowest price at which you’re willing to sell an
item, it’s time to get to the fun part. Like in grade school, you can
generate a hypothesis about which prices will do best, but ultimately
the resulting data will hold your answer. There is no way to know the
correct price for a product because there never is one; it’s always
changing due to pricing variables such as seasonality, competitor pricing,
and more. When you begin selling a new product on your website you are
fully in the driver’s seat of your pricing. Your first price is an
important one, as it will serve as an anchor from which shoppers will
compare all other prices you post.
4. Learn from testing
A/B testing your pricing is an opportunity to learn more about your
customer base and what gets them through checkout. Each time you change
prices, mountains of data are produced and it contains golden insights.
How many products sell at which prices and at what time? At what price
point is revenue or profit maximized? Strong pricing strategies start
with strong data and most importantly, analysis of that data.
5. Stay true to your brand
No retailer wants to be pulled into a price war. It kills profit
margins and presents an inconsistent brand image to shoppers. Pricing
plays an important role in shaping consumer perceptions about a brand.
It’s important to manage the way pricing influences brand associations
and always take into account pricing’s effect on brand equity, the ways in which consumers determine brand value, and strategies for managing the role of price.
Why automated pricing optimization matters
There’s a fine line between succeeding in online retail and being mediocre.
Being uncompetitive or losing sight of the competitive landscape for
even a short period of time can lead to a significant decrease in sales
and profit. But keeping up with the market, collecting the data, and
repricing manually is impossible, especially in real-time.
Pricing response time is key. Did you know that Amazon reprices as
often as every 10 minutes? That’s why many online retailers choose to
automate the process. Automation keeps retailers optimized around the
clock. The market changes quickly and your pricing should be able to
keep up with it.
Fixed pricing is dead, but continuously optimizing price through dynamic pricing keeps retailers relevant.
About the author
Angelica Valentine is the Content Marketing Manager at Wiser,
the leading pricing intelligence suite. Wiser’s flagship product,
WisePricer is a full-featured pricing and merchandising engine that
monitors, analyzes and re-prices retail products in real-time.
WisePricer enables retailers to grow profit margins, price with
confidence and improve merchandising through powering the development of
a sound pricing strategy.
Image credits: 1 | 2
How can price optimization help a retail business?
Retail price optimization models let businesses completely take
advantage of what shoppers aren’t opposed to spending by knowing both
when and how they spend.
With the proper analysis of the manner in
which consumers spend, businesses are able to make the most revenue in
each situation.
Looking at how an item did based on its previous time on the market
is no longer useful since there are a number of factors that influence
it today. A few of them include:
The number of items
The complexity of items
The fact that buyers are more aware of prices
Therefore, let’s take a look at how retail business can use price optimization to their benefit.
Reap immediate financial benefits
Solutions for retail price optimizations provide opportunities to
concentrate on various goals, whether it be margin or the amount of
sales conversions, etc. For instance, with optimized prices, sales in a
specific area aren’t as big anymore, yet the margin as a whole has gone
up.
In fact, the Chief executive officer at Michael Kors Holding LTD claims
that buyers no longer care about the price as much as they do the item
itself. This is backed up by the fact that both their Mercer handbags
and smartwatches were all sold at their initial price, thus making them
as profitable as they can be.
Therefore, if Michael Kors can do it, then so can you.
2. Working in parallel with categories
With the help of both planning the optimization of prices, the prices
of the methods will be allocated to specific pricing strategies and
additionally, they’ll be put to work automatically. Therefore, both
consistency and cohesion are guaranteed for the pricing strategy which
helps with the management of the entire category development.
This is also highly beneficial to the category manager since it’ll
ease up and simplify their incredibly complex work of dealing with all
of the categories.
3. Automation
Solutions for retail price optimizations help automate the entire
optimization process. This helps remove the need for any manual work,
thus reducing the possibility of any human-made errors from occurring.
Therefore, incorrect predictions won’t be made so optimization won’t
negatively influence business in any way shape or form.
There’s no need to make random predictions and hope for the best.
With the data that businesses can receive today, they can adjust their
prices automatically whenever a change may occur, across all channels.
Do you wonder why Amazon is the giant that it is today? Well, it
doesn’t shy away from price changes! In fact, they adjust the prices millions of times a day, and they do so with a compelling price optimization software.
4. Guarantee consistency
There’s no longer the need to worry about whether or not prices are
consistent when using retail pricing analytics. Past mistakes came from
inconsistencies with the units used or the pricing for similar, yet
different items due to features such as size or color. As a result,
businesses can depend on the data to always be correct and relevant.
5. Speeds up how quickly decisions are made
There’s an increase in the rate in which decisions are made due to
automation, which provides reviews and comparisons with rivals very
often.
Price optimization utilizes analysis of big data to predict the behavior of potential buyers to different prices.[7][8]
Companies use price optimization models to determine pricing structures
for initial pricing, promotional pricing and discount pricing.[9]
Price optimization uses calculations to visualize how demand
varies at different price points and combines that data with cost and
inventory levels to develop a profitable price point for that product or
service.[10]
This model is also used to evaluate pricing for different customer
segments by simulating how targeted customers will respond to price
changes with data-driven scenarios.[9]
Price optimization starts with a segmentation
of customers. A seller then estimates how customers in different
segments will respond to different prices offered through different
channels.[11]
Given this information, determining the prices that best meet corporate
goals can be formulated and solved as a constrained optimization
process.[1][12] The form of the optimization is determined by the underlying structure of the pricing problem.[1][12]
If capacity is constrained and perishable and customer
willingness-to-pay increases over time, then the underlying problem is
classified as a yield management or revenue management problem.[1][12]
If capacity is constrained and perishable and customer
willingness-to-pay decreases over time, then the underlying problem is
one of markdown
management. If capacity is not constrained and prices cannot be
tailored to the characteristics of a particular customer, then the
problem is one of list-pricing. If prices can be tailored to the
characteristics of an arriving customer then the underlying problem is
sometimes called customized pricing
Price optimization is an important
component of overall price management which is crucial to profitability.
In fact, it is the next frontier of insurance policy management.
Understanding pricing at a finite level is a
prerequisite to understanding the sensitivity of price changes. It is
one of many variables that can be used to estimate the elasticity of
demand for each life insurance policyholder's risk profile. When all
these variables are analyzed, it is possible to identify the cluster of
policyholders that are more price-elastic.
So what are the components of an effective price optimization model require?
Cost models - These predict the net claims and other costs for customers
Competitive management analysis - This provides an analysis of the market in which the company operates
Customer elasticity models - These reflect market competition
and customer behavior in order to predict volume of new business and
renewal rates for customers at different rates
P rice Optimization Models are mathematical programs that calculate how
demand varies at different price levels and then combine that data with
information on costs and inventory levels to recommend prices that will
improve profits. The modeling allows companies to use pricing as a
powerful profit lever, which often is underdeveloped. Price Optimization
Models can be used to tailor pricing for customer segments by
simulating how targeted customers will respond to price changes with
data-driven scenarios. Given the complexity of pricing thousands of
items in highly dynamic market conditions, modeling results and insights
helps to forecast demand, develop pricing and promotion strategies,
control inventory levels and improve customer satisfaction.
Usage and satisfaction among survey respondents
How Price Optimization Models work:
Price Optimization Models should factor in three critical pricing
elements: pricing strategy, the value of the product to both buyer and
seller, and tactics that manage all elements affecting profitability.
Practitioners should:
Select the preferred optimization model, and determine desired outputs and required inputs
Collect historical data, including product volumes, the company’s
prices and promotions, competitors’ prices, economic conditions, product
availability, seasonal conditions, and fixed- and variable-cost details
Clarify the business’s value proposition and set strategic rules to guide the modeling process
Load, run and revise the model
Establish decision-making processes that incorporate modeling results without alienating key decision makers
Monitor results and upgrade data input to continuously improve modeling accuracy
Companies use Price Optimization Models to:
Price Optimization Models help businesses determine initial pricing, promotional pricing and markdown (or discount) pricing:
Initial price optimization works well for companies with a stable
base of long life-cycle products—grocery stores, drug chains,
office-supply stores and commodities manufacturers.
Promotional price optimization helps set temporary prices to spur
sales of items with long life cycles—newly introduced products, products
bundled together in special promotions and loss leaders.
Markdown optimization helps businesses selling short life-cycle
products subject to fashion trends and seasonality—airlines, hotels,
specialty retailers and mass merchants.
Price
optimisation is the process of finding that pricing sweet spot, or
maximising price against the customers willingness to pay. Companies up
and down the supply chain, both in B2B and B2C settings, rightly
dedicate a massive amount of time towards price optimisation to ensure
that their products will sell quickly at the right price while still
making a decent profit.
If an item is priced too high, it may not sell at all, while if the
price is reduced too much, the business will not make a profit.
Businesses use a price optimisation formula based on the overall demand
for their product, their level of competition, and (in the case of
manufacturers) the cost of manufacturing their goods.
Finding the perfect balance between profit and value is essentially
what price optimisation is all about, and because the relative values of
goods and services constantly change, this is a never-ending task for
most businesses
Identifying the optimal prices for
products was once a time-consuming process. That’s changing as
businesses start to take advantage of advances in machine learning,
increases in computing speed, and greater availability of data.
Until fairly recently, price optimization has been restricted
primarily to certain industries that have limited inventory, such as
airlines and hotels. It’s complex work, demanding the analysis of vast
quantities of data and a deep understanding of competitors’ behavior.
Few organizations could optimize the price of more than a handful of
products at one time.
But this is changing. Thanks to the growing availability of internal
and external data, advances in machine learning, and increases in
computing speed, price optimization can be applied more broadly. We have
developed a way to set optimal prices for hundreds of stock units in
near real time and on an ongoing basis.
In trials of our pricing technology with three online retailers, we
found that we were able to increase each retailer’s revenue, market
share, and profit for selected products by double digits. What’s more,
although the examples described in this article involve online
retailers, the price optimization method we developed is also
appropriate for brick-and-mortar retailers; we recently implemented a
similar method at a brewing company, where we optimized the company’s
promotion and pricing in various retail channels with similar results.
Pricing
strategies have to be considered as one of the most crucial growth
efforts for e-commerce businesses in order to maintain a healthy and
sustainable business life. Depending on industry or scalability of your
business, you should apply various effective pricing strategies and focus on continuous price optimization.
Pricing
your products on a monthly basis or leaving them fixed will definitely
have an impact on diminishing in conversion rates and customer numbers.
Having different pricing strategies towards different scenarios in your
pocket helps you to improve your financial health and performance in an
ultra dynamic industry- e-commerce. So, let’s dig most obvious reasons explaining why e-commerce businesses should continuously focus on price optimization.
1- Not Just Focus on Cutting Prices
If
your offerings don’t satisfy online shoppers’ expectations, they won’t
hesitate to leave your store for a competitor in seconds and your
competitors are eagerly waiting to welcome them. On
the other hand, setting low prices doesn’t always mean a winning move.
It is acceptable to lose some of your online customers if you decide to
keep product prices on a certain level. The good news here, that move
will likely lead you to win loyal customers who will purchase more than
once. Try to focus on loyal online shoppers who are willing to continue
purchasing from you even you keep product prices high compared to your
competitors. Most of
e-commerce companies try to keep the product prices as low as possible
to win the best deal game. So, increasing prices at small percentages
such as %5 won’t change their lowest-price position. In these cases, you
can consider increasing the prices in order to test online shoppers’
reaction. Competitive
intelligence software is useful to monitor the market and your
competitors. Using these softwares, you can effectively gather the data
of competitors’ prices. So that, you can identify the promising
categories and increase the prices while keeping your competitive
position.
2- High Profitability Is Mostly About Low Costs
In
e-commerce, you never guess your costs. There are many fluid reasons
that affect the unit costs. Let’s give a brief summary of these factors;
the major slice of your costs comes from the supplier – the price that
you pay for products of supplier. Besides of that, we can count
marketing, staff, inventory costs as overhead costs. As
supplier costs are the big portion of your overall costs, it will be a
wise approach to try decreasing the supplier costs as much as possible.
Supplier costs depend on two different factors; purchase quantity and
negotiation with supplier. The explanation of the correlation between
quantity and costs is simple. If you buy a high amount of product, the
unit cost of each product will decrease. But, the negotiation with
supplier is much more unpredictable and depend on various circumstances
such as the power of online store in the market, supplier – retailer
relationship, etc. E-commerce companies should prioritize decreasing the
costs by finding a solution to balance these two factors. In order to minimize the overhead costs, you should continuously try to optimize and automatize them.
3- Time to Adapt Dynamic Market by Applying Competitive Pricing Strategy
Pricing
is one of the most prominent decisive factor in e-commerce. Thanks to
the vast of product variety and price comparison engines, consumers can
find any product with best prices. Moreover, %60 of online shoppers name
pricing as their main shopping decision criteria. So,
competitive pricing strategy gains importance while competing in
dynamic landscape. Monitor your competitors’ pricing actions, convert
them into actionable insights and test how your pricing decisions will
be perceived by online customers. As
mentioned at the beginning of the post, having constant product prices
will be the most harmful decision for your e-commerce store. Not only
you’ll have difficulties in acquiring new customers, the profitability
will also be stuck down. By adapting competitive pricing, you’ll have
great flexibility towards various scenarios happening in dynamic market.
To conduct this strategy, you’ll need some competitive price
intelligence. Competitor price tracking software is seamlessly efficient
to generate actionable insights and helps you to take accurate pricing
decisions. By acquiring competitor price tracking software, you’ll
expand the opportunities of boosting sales and profit margins. The
price competition in e-commerce is fierce. E-commerce companies who try
to gain benefit from this competition will have a great advantage over
the competitors. In order to get this competitive advantage, e-commerce
companies should separate a significant time to price optimization.
Charm pricing
Psychological pricing (also price ending, charm pricing) is a pricing/marketing strategy based on the theory that certain prices have a psychological impact. Retailprices are often expressed as "odd prices": a little less than a round number, e.g. $19.99 or £2.98.
With charm pricing, you can target the psychology of customers in
the best possible way so that they end up making a purchase. When
retailers are effectively using this strategy it boosts up the sales and
improves the conversion rates at an alarming rate.
What are charming price codes? Well, they are nothing but the
commonly seen price tags like $ 2.99, $ 3.99 etc. These are referred as
nothing but the charming price codes!
Yes! Even studies have shown that the prices which end with $9 are generally perceived as smaller.
When customers see believe that this kind of price is lower than the
whole figure of the $4 or $5. People start feeling happy and get
subconsciously persuaded about a fact that they bought something for a perceived larger savings than the actual.
Behavioral pricing does wonders
Behavioral pricing is a unique and new concept related to the
e-commerce platform. This kind of pricing lets you decide the best
prices for products based on how the prospective customers are behaving
online. Now, the question that arises is that how can you identify such
behaviors?
Do A/B testing of pricing across a wide range of mediums then analyze
the online data (such as browser search history, social network
engagements, and click-paths of online shopping) to find out which
prices increased the targeted behavior. By applying those price to your
site, you should be able to raise conversions. It is in the best
interest of your business to continually A/B test your pricing to see if
you find an option that is more profitable.
With that said, how do you determine the best price for each of your products at any given time?
Once you decide the lowest price at which you’re willing to sell an
item, it’s time to get to the fun part. Like in grade school, you can
generate a hypothesis about which prices will do best, but ultimately
the resulting data will hold your answer. There is no way to know the
correct price for a product because there never is one; it’s always
changing due to pricing variables such as seasonality, competitor pricing,
and more. When you begin selling a new product on your website you are
fully in the driver’s seat of your pricing. Your first price is an
important one, as it will serve as an anchor from which shoppers will
compare all other prices you post.
How Price Optimization Models work:
No comments:
Post a Comment