Retail price strategies: dynamic pricing as sales leverage

A retailer’s success when selling products depends not least on the pricing strategy. But how do you determine what price will generate high sales and still retain a sufficient margin for the retailer? Retail product prices are subject to constant fluctuations and are exposed to many influencing factors.

Every day, category managers are faced with the challenge of optimally adapting the prices of thousands of products. Due to the enormous amount of work involved, the obvious answer seems to be to manage product prices automatically. Dynamically generated prices provide retailers and customers with decisive advantages.

In practice, dynamic pricing is already in use in many business models. ebay started it all with its auction concept. Google still controls its Adwords advertisements using dynamic selling prices and dynamic pricing has been the order of the day for years in the travel industry e.g. flight tickets and hotel bookings. Now the number of those in retail using automated price optimization is growing.

How does dynamic pricing work?

For many retailers, competitor prices are the main focus of their own pricing. However, procuring market prices eats up a lot of time and resources. That is why the customer is much more important. What is the customer willing to pay and how does the customer react to price changes?

There is a lot of information available to online shop operators, especially in e-commerce: it is easy to see how often an item has been clicked on or purchased. Calculating a demand function is thus no problem. It only takes a few steps to determine price elasticity by measuring reactions to changes in price. From there it is possible to extrapolate to determine future customer reactions. The right pricing engine can automate these steps. Many other influencing factors can be included in the calculations in real time: past data, current behavior (prices, purchases), product data (contribution margin, inventory) or external data (weather, social data). A pricing engine acts according to a retailer’s fixed objectives (turnover or contribution margin optimization etc.) as well as according to the retailer’s corresponding set of rules. The fear felt by some retailers of completely taking pricing out of their own hands by using a pricing engine is unfounded. Category management determines things like the upper and lower price limits as well as the time intervals of price changes. In addition, if desired the pricing engine can send a message prior to major price changes.

Dynamic pricing in practice

A wide variety of application areas in price optimization require special pricing algorithms. Such scenarios are already in use in practice. For example, individual price optimization (especially well suited to products with short life cycles e.g. food), the optimization of prices across a product range/entire range and campaign-based price optimization (e.g. deal of the day).

The combination of intelligent pricing and a personalized approach is an important aspect: offering appropriate discounts for products that suit individuals instead of using the watering can principle (the same discount for the same product for all customers) which does not take into account the individual interests of the customer. This is made possible by combining personalized product recommendations and individualized discounts. One example of this is product bundling: in an online shop a customer is offered a set of two products at a discounted price. Based on his interests (actual clicks and purchases) he should be interested in these products. The combination of intelligent couponing and personalized products helps retailers offer customers a real-time personalized shopping experience while maintaining margins. Another example of automated pricing in bricks and mortar retail is checkout couponing at the grocery store, for example. Upon completion of a purchase, a discount is generated based on the contribution margin of the goods (physically in the store or for a mobile app in the form of a slot machine). The grocery store customer can then use the discount coupon for a later purchase or donate it to a good cause. The combination of dynamic price optimization and recommendations in newsletters has also been in use for quite some time.

More orders, more turnover. And the customer?

The benefits for the retailer are obvious: pricing automation saves a lot of time and resources. When prices are adapted instantly to changing factors (e.g. customer reaction or weather), retailers can react as quickly as possible. Using intelligent pricing algorithms also ensures that sales and profit potential are maximized. The retailer can even push so-called long tail or niche products: first of all the products in less demand are discounted and then the price slowly increases again with demand.

Retailers are not the only ones who benefit: Customers receive appropriate discounts for products in which they are actually interested. Combination deals and top deals constantly provide new incentives for customers to make purchases while taking advantage of discounts at the same time. The customer saves time and avoids stress: personalized recommendations and discounts allow favorite products to find the customer instead of the customer spending time looking.

Keep an eye on all customer touchpoints

Dynamic pricing can be used via various customer touchpoints in both online and bricks and mortar retail. Examples of this include automated product prices in the online shop, newsletter or mobile version of the online shop, personalized discount coupons during one-on-one customer service in the branch and checkout couponing. A consistent omnichannel pricing strategy that focusses on the customer and his needs is important for the retailer. With this strategy, prices for a certain customer should be the same at all touchpoints for the same retailer and should not vary depending on the sales channel. A pricing engine that not only optimizes prices in the product range but also takes customer interests into account is in a position to provide major support to the retailer. Many retailers have been successfully using the prudsys Pricing software, a solution of the prudsys Realtime Decisioning Engine (prudsys RDE for short), for years.