The Importance Of Smart Pricing
If you've been keeping your prices static throughout the year or even on a day to day basis, you might be surprised to learn that you are still pricing like it’s 1999. The reality is, technology now allows retailers to optimize their prices dynamically to adjust for supply and demand, among other factors.
This guide will show you how you can use smart pricing for your own products, and the resources, including technology, you need to compose smart pricing.
Advantages Of Smart Pricing
The MIT Sloan Management Review did a study
on smart pricing and found examples of benefits including revenue maximization. In a smart pricing set up, the prices charged for products or services depend on the current conditions in the market, and a firm may change prices dozens of times a day for the same product.
These changes may be quite subtle, perhaps within a fairly narrow range, but allow the business to capture more value from its market position.
Firms that use smart pricing to determine when to offer promotions, for instance, are often able to boost their profits and sales, at least in the short term. Smart pricing can also help sellers pinpoint the best best time for retail markdowns, which, as the Sloan Management Review found, are heavily used by retailers of seasonal goods.
When Is Smart Pricing Right for Your Business?
As reported in a Forbes
article on pricing, Amazon uses dynamic pricing frequently during the holidays. According to the article, 57% of survey participants reported that dynamic pricing was more effective for them than price matching, which is another price strategy to help in competitive markets.
There are right times and wrong times to employ dynamic pricing. The holidays, for instance, are an ideal time to price products dynamically.
Your business can take advantage of surging demand for certain holiday goods, then lower those prices again as demand cools after the big sales periods.
Establishing Smart Pricing Objectives
When using smart pricing, it’s essential to define your smart pricing objectives ahead of time. Your objectives could be as simple as maintaining margins given variable cost of goods, or more complex to include things like competitor prices and seasonal adjustments.
Why You Need Pricing Objectives
It can be tempting to just jump in and adjust prices on the go, but you could make some pricing mistakes with such an approach.
Your store may be selling products with a combined total of price points in the hundreds thousands. With so much data to keep track of, it's easy to confuse things and make mistakes.
Setting pricing objectives ensures that you start out with a clear definition of what success looks like for your efforts.
How To Set The Right Objectives
You should take a variety of business factors into account for your smart pricing objectives, including:
- Frequency and scale of product price updates
- Which products you want to apply smart pricing to
- Long term impact on market share
- Overall business profitability
- Impact on your brand image
- Other strategic considerations
Each business will weigh the factors differently to set the objectives they want smart pricing to accomplish.
The Right Technology For Smart Pricing Implementation
You will need to consider your options for a smart pricing technology solution. Larger retailers can end up having thousands of price points that are all part of a smart pricing system. Having powerful technology can help you make these price changes fast and seamless.
Price Intelligence Software
After identifying your competitors for the products you sell, you input their URLs into your price intelligence software, and identify the products to monitor. The software will then bring you daily or even real-time price updates of price changes in the market.
Dynamic Pricing Engines
Dynamic pricing engines will help you set rules for price changes that should go live in your store based on conditions you monitor.
For example, if supply of a product is low, a pricing engine could adjust prices automatically in your store. These, and other, software tools make implementing smart pricing a breeze when you have a clear objective in front of you.
Data Collection For Smart Pricing
With your objectives and smart pricing tools in place, it’s time to start collecting data. For a real smart pricing system, you need both external data, from the market, and other internal data that accounts for conditions in your business.
Market data is external data that your price monitoring tool should be able to collect for you automatically on a day to day basis. This data helps you adjust prices down or up depending on competitors’ moves.
Internal Data You Must Consider
Not all the data you need for smart pricing is available from third party analysis alone. A smart pricing implementation must also reliably gather and aggregate internally-sourced data that feeds into the pricing process.
A hotel implementing smart pricing, for example, might take into account daily or hourly data about how many of its rooms are vacant, and make this internal data a part of the price equation.
For your business, internal data could include such things as inventory levels, age of the inventory, and resupply availability, among others.
Pricing Analytics And Product Repricing
The pricing analytics and product repricing step is where your smart pricing engine or set up comes to life.
Analytics and product repricing refers to the processing of collected data and the feeding back of this data into your storefront through updated prices for your products.
For smart pricing, the ideal is fully automated analytics and repricing, which will all happen in real time with no human involvement in the pricing decision.
While no humans might be involved in the real time updates, it doesn't mean they are disengaged from the process. You will be involved in the setting the rules as well as analyzing the results to see where optimizations can be made.
You need to evaluate granular data such as the price points in your system, as well as whole-system data such as the impact of your smart pricing system on monthly profitability. If you find that something is working well, try to figure out why, and document it for future reference.
If your prices result in the wrong outcome, analyze the situation and determine where your smart pricing system is falling short so you can rectify it.
Composing Smart Pricing Does Not Need to be Complicated
Smart pricing can improve the bottom line of your retail business and give you a long term edge against the rest of the market. Businesses that have found success with smart pricing include such diverse enterprises as Amazon, small retailers, hotel operators, and others in competitive markets.
To compose smart pricing, you need to begin with a set of pricing objectives that make sense for your business. You also need to select the right pricing technology to support your needs. Your system will need to collect and process a mix of internal and external data. This processed data then has to find its way into updated prices in your storefront.
Finally, you always need to be engaged in managing and evaluating the effectiveness of this highly automated process in order to improve its results over time.