Dynamic pricing. Its appeal is obvious: adapt pricing — in-store and online — to drive demand, maximize margins and build customer loyalty. Yet I find retailers questioning both its value and validity. Just how realistic is it to expect price changes every few hours or days when weekly and monthly changes at the store level are challenging enough? Is it a game-changer or a gamble? Consider these six steps toward pricing optimization excellence:
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It Can No Longer Be Speculative. There’s a long history of pricing activities that aren’t strategic. It’s largely speculation of what we think or feel about products, categories and assortments. Speculation and “flying by the seat of your pants” is not a pricing strategy that is sustainable or profitable. Winning retailers are more sophisticated and scientific.
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Make It About The Art And Science. Minus speculation, a pricing strategy must incorporate and harmonize art and science. The art is the personal experience and business processes within a retail organization. Working with the science means using business intelligence and data to drive pricing decisions. Ultimately, this collaboration between art and science yields a better shopping experience for your shoppers.
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Avoid The Competitor Conundrum. Too often, pricing becomes little more than competitor price matching. The problem is two-fold: First, simple price matching neglects differences in shopper experience due to assortment variety and service. Two, price matching fails to discriminate on which products and competitors matter. Bottom line, if most decisions are based largely on matching competition, pricing decisions are usually wrong.
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Examine The Attributes. A step back from the “same ‘ol, same ‘ol” requires clarity about competitors, a focus on customers, followed by a forecast. Some initial insights:
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Competitive Clarity: Know your competition — the ones you really compete against, not the ones you assume you’re competing against. Analyze key factors such as:
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What competitors am I competing against?
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Which products do they carry that I must compete against?
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How sensitive are my products to the competitors’ prices?
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How often are these products promoted?
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Customer Centricity: Dig even deeper into the customer data. For example:
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What do they regard as the most price-sensitive and least sensitive products?
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What do they consider substitutes for a product?
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What products sell together in my most valuable customers’ basket?
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Forecast Impact: Before price changes go live, conduct a thorough yet timely forecast that assesses the revenue-profit-margin-unit impact of price changes at the category, cross-category and enterprise level.
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Redefine The Dynamics That Matter. What matters is what works for your organization in terms of pricing software and systems. It’s really just that simple. A retailer must demand proof (not promises) that the pricing science and automation really deliver a sustainable competitive price strategy; that the solution can model and analyze customer demand (elasticity) and competition; and that there is an enterprise view of categories, product lines, product and relationships. Be sure your vendors are working with you to provide the science, technologies and expertise that work in today’s market. These are the dynamics that really matter.
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It Requires Risk to Reap Reward. Many retailers have a certain mentality about IT spending and vendors. They prefer to play it safe with vendors and solutions. It’s often perceived to be easier to renew a license, even if the solution is sub-standard. The reality is antiquated systems and software are a competitive disadvantage. No risk, no reward.
It’s time to re-think and re-engineer retail pricing — to think and act beyond the technologies and techniques of yesteryear. Good data, rigorous science and strategic execution can turn initial conversations about dynamic pricing and price optimization into a proven retail game-changer.
Go ahead, change the game. Reap the reward.
Jim Sills, Ph.D., is President and Chief Executive Officer at Clear Demand, a company serving global retailers with software and services that improve and advance omnichannel retail operations.
