Do you know how much a basic umbrella costs just off the top of your head? Probably not. Unless you have recently purchased one. Now imagine that you are walking downtown and are caught in a downpour. Your umbrella is in the car, or is it? Depending on how much of a hurry you are in, you now have a few different options: You can go to a cafe and wait until the rain stops. If you are really in a hurry you can continue to run and you will get wet. If you are on the way to an important meeting then you buy an umbrella on the way. In that situation you probably don’t care much about the price, the main thing is that you have an umbrella.
But you are probably not completely oblivious to the price. Normally you have an idea of what an umbrella goes for and how much you are willing to pay for one. This is known as price acceptance, the price corridor between “too cheap” (in other words poor quality) and “too expensive”. Of course, downtown umbrella vendors adjust their umbrella prices based on the current weather. The calculation is straightforward and simple; a small selection with few influencing variables (1 sales channel, weather, competition, customer).
What about you: How large is your selection? How many sales channels do you have? How many competitors are active in the market? Are you seen as more expensive or more reasonable than other suppliers in your range?
Are you always selling at the best price?
In reality, the situation is much more complex and volatile. In the case of large selections with many influencing factors it is no longer possible to manually optimize prices in the time frame the market demands. That is why, according to the Bundesverband E-Commerce und Versandhandel Deutschland e.V. (bevh) [German Association for eCommerce and Mail Order Business], an increasing number of retailers rely on dynamic pricing strategies.
What is extremely important here is the difference between so-called repricing tools and intelligent price optimization. Repricing tools follow rigid price rules which are frequently based only on the price behavior of the competition. In other words, price adjustments take place as a reaction to a sale put on by other market participants. Such solutions present the risk of ruinous price distortions and competitors end up in a price war.
Now, cross your heart: Is it actually your goal to always be the cheapest of all retailers? Whenever your corporate and pricing strategy does not contain price leadership, using an intelligent pricing solution is something you should consider.
Intelligent pricing solutions based on artificial intelligence (AI) actively optimize prices in terms of the specified target parameters in your pricing strategy (or a combination of parameters). The pricing solution continuously analyzes huge volumes of data. The algorithms optimize the pricing as regards the target parameter and include all of the pricing factors relevant to your range of products and strategy. They adapt thousands of product prices completely automatically to customer behavior as well as to constantly changing market and corporate situations. They react to changes in influencing factors in real time and are constantly learning. The following figure illustrates some of the possible factors that can influence pricing.
What are the benefits of dynamic pricing?
The great advantage of dynamic price optimization is that pricing is not cost-driven. Instead, customer price acceptance becomes the focal point. In principle, it is important to understand that a dynamic price is always a fair market price. Fair market both in terms of the how the consumer perceives value and in terms of supply and demand. With intelligent price optimization you get the best out of your pricing strategies while optimizing turnover, sales and profit.
Dynamic price optimization can be applied to the entire range of products. In addition, electronic price tags have now made it possible to use price optimization in bricks and mortar retail. You will have the most success with dynamic price optimization if you have defined a differentiated price strategy that defines and prioritizes exact target KPIs, both globally and for various product groups. Based on your KPIs our pricing experts select the right algorithms to optimize your prices.
On top of using it for the entire range, a number of special requirements can be implemented with dynamic pricing, for example:
- Markdown pricing: With this pricing strategy the AI optimizes markdowns and inventory for items with a limited shelf life (e.g. fresh produce in grocery retail) or for items with quick value decline (e.g. seasonal items in the fashion industry). At the same time, as a retailer you can achieve the largest earnings possible at any time when selling your products without giving away margins by discounting too early or too much.
- Cross-price elasticity: When pricing, the algorithm takes into account interdependencies between substitution and complementary products. It thus encourages the sale of high-margin alternative products or takes into account inventories when pricing complementary products.
- Automated pricing for longtail products: This pricing solution prices your slow-moving products automatically, achieving optimum earnings from your sales at any time. At the same time it minimizes the workload for your category management.
- Intelligent couponing: DThe intelligent algorithms generate automated product recommendations with maximum personal relevance. The AI-based solutions combine these recommendations with personalized discounts. This way you increase the purchase frequency of your customers and achieve more turnover through cross-selling and upselling.
- Intelligent bundle pricing bzw. price bundling: Intelligent solutions combine recommendations with dynamic pricing in this case as well: For every product your customer is specifically interested in, recommend one other product to them and offer a price advantage for this bundle. A clever combination of products increases both purchase frequency and profit.
Dynamic pricing helps you achieve profit increases of up to 20 percent and more. You strengthen your price image while getting the most out of your pricing strategies. Dynamic pricing also brings with it an enormous increase in efficiency as the AI takes the repetitive and monotonous activities like pricing off people’s hands. But don’t worry, people are not going to become redundant. You determine the pricing strategy, your category management sets the framework and tells the algorithms what to do, the AI takes care of the calculation. You determine the frequency at which the prices actually change at your touchpoints. You define whether or not the prices are generated completely automatically (e.g. for the longtail) or passed on to category management as pricing suggestions (e.g. for key items). Automation gives you the freedom to concentrate on strategic topics and improve service in the stores.