One of the very basics of marketing is that the optimal price is the right offer at the right time to the right customer. In today’s fast-paced, competitive, omni-channel retailing world, price optimization requires highly dynamic, rule-based pricing that responds in real-time to changing contexts. Based on our extensive experience in the competitive pricing and price optimization fields, we have put together 13 rules – both do’s and don’ts – that are the basis of smart rule-based pricing, i.e., dynamic pricing that gets you maximum sales volumes at maximum margins:
Setting the Stage
In the spirit of “think before you act”, the following three rules are essential preparation for a successful rule-based pricing strategy.
- Understand the patterns and norms of your industry: Are there many suppliers/vendors or is it a fairly empty playing field? Is your industry highly price competitive or do consumers tend to base their purchasing decisions on other factors? Does your industry provide essential products or nice-to-haves? What is the typical buying cycle in your industry? NOTE: The latter is important because your repricing frequency must be well-aligned with the buying cycle. Consumers don’t like it if the price changes while they are making their purchasing decision.
- Understand your customers: Build a profile of each of your relevant customer types, including what kind of retail experience they are used to, their level of tolerance for repricing, how their behavior may change depending on the selling context. For example, consumer behavior and expectations will be very different when shopping on a marketplace vs. an independent webstore.
- Get some hands-on experience: Spend some time manually repricing a few items and observe what happens. Lower or raise a price and take note (a) how your competitors respond – who follows, who ignores and (b) how consumers respond – did sales volumes go up or down, and on which channels?
Unless you are selling a small number of SKUs on a limited number of channels, the bad news is that you are going to need to invest in tools to manage your rule-based pricing activities. The good news is that there are excellent tools available.
- Test pricing scenarios: On a regular basis, use your optimization software’s analytics capabilities to simulate the impact of various price points on revenue, profit and margins. These analyses will help you build and fine-tune robust pricing models.
- Follow the optimization software’s repricing recommendations: A good tool that is properly configured (see Rules 6 through 11 below) will save you time and costly mistakes.
Slice and Dice
The devil is in the details. The more that you segment your competitors or your product assortment, the better results you’ll get from your repricing activities.
- Be competitor-specific: Make a list of your top competitors and create different rules for each one based on their pricing patterns. HINT: Do not try to be cheaper than Amazon. Their deep pockets allow them to sell products below cost if necessary.
- Be category-specific and, for super-strategic key items, even product-specific: Adapt your rules to product stock levels and sales levels, as well as to the unique retailing characteristics of different product categories. REMINDER: Do not ignore your tail items! See 5 Tail Management Challenges + 1 (Important) Tip for Success.
- Create rules based on ANY attribute: If you have unique business characteristics, such as time of year seasonality, product attribute, or competitor behavior, these need to be incorporated in your rule logic. As long as you store the data, you can then use it for setting up new rules.
Know Your Limits
Automated repricing software makes its recommendations based on, among other parameters, target margin and minimum margin provided by the retailer.
- Take into account indirect product costs when setting your lower limit: The indirect costs of doing business – such as salaries, space rental, storage fees, currency exchange – have to be factored into your cost models for your products. Ignoring this rule can undermine the stability of your business.
- The sky is not the limit: Don’t forget to create over-pricing rules that will ensure that your product is never priced at an unreasonably high level that undermine consumer confidence and damage your price image. One way of doing that would be to set a rule that states your price will never be more than X% higher than a certain competitor/s.
- Test your price changes continuously and re-evaluate as necessary. If you’re selling a dollar higher than the competition but sales volumes are still good – why lower the price and lose margin?
It’s All in the Timing
Automated repricing tells are agile and responsive enough to let you make the most out of time-related consumer purchasing behavior.
- Set your pricing rules to be based on your stock levels, sales volumes and sales patterns in your target market(s).
- Capture seasonal pricing opportunities: Define a date range for a price change rule in order to take advantage of holiday periods or special retailing opportunities such as back-to-school.