The three pillars of dynamic price optimization

Great strides are being made in the realm of digitalization. Dynamic price optimization is the most important aspect of any retail digitalization strategy as it leverages huge gross profit potential for retailers, both online and in bricks and mortar stores. Concerns do still arise, however, as pricing is a sensitive topic for most companies. In order to address these concerns it is helpful to understand how dynamic pricing works.

Basically, the same is true for dynamic price optimization as with all other digitalization topics: the competition never sleeps so not acting is simply negligent. Dynamic pricing is classified as disruptive technology, boasting huge advantages for companies that use it and disadvantages that put the company at risk if they do not use it. The technology that became standard in online retail in just a few short years is now moving into bricks and mortar retail. Electronic Shelf Labels (ESL) are helping make this a reality. These labels are not, however, an absolute prerequisite to achieve success with dynamic pricing.

prudsys AG has been involved with the topic of dynamic pricing since 2008. prudsys Realtime Decisioning Engine (prudsys RDE for short) adapts thousands of product prices completely automatically to the constantly changing influencing factors including market and company situation. The goal of dynamic pricing can vary greatly. On top of maximizing gross profit there can also be other objectives such as increased turnover, increased sales, increased customer frequency and inventory optimization.

At prudsys we differentiate between three independent pillars of dynamic price optimization:

1. Automated Pricing

prudsys algorithms use price elasticities to calculate the optimal selling price based on a predefined target function, automatically putting this price into effect in all sales channels. Exception management notifies the category manager of any outliers, which the manager can then personally approve or adapt, e.g. if the price suggested by the system deviates too much from the original price. Automated pricing is suited particularly well to base items and products subject to price skimming as well as inventory optimization for seasonal items.

2. Strategic Pricing

In this case, the prudsys algorithms calculate a suggested price for the category manager. The category manager then uses a functional user interface to understand why this is the optimal price. Beyond that, the manager can also simulate what effect the suggested price will have on a given target KPI. The category manager then manually conducts pricing after verifying or adapting the suggested price. Strategic pricing is used for base price and price focus items.

3. Intelligent Couponing

Intelligent couponing is a special form of dynamic pricing. Real-time capable and personalized coupons are automatically generated for selected recipients. Using intelligent couponing means that the number of A customers can be increased significantly or that newsletter conversion rates can be increased into the double-digit percentage range, for example. It is also possible to accurately control the promotion of profiling categories using intelligent couponing in order to, for example, acquire new customers for certain product ranges.

The types of dynamic pricing are as extensive as the different pricing strategies in retail. prudsys dynamic price optimization adapts to the respective objective. An A/B test can be used to test the performance of the prudsys RDE with minimal setup effort.