Strategies in Pricing Intelligence
It’s easy to assume that cutting prices is the fastest way to boost your sales, but the truth could not be more different. Discount pricing is just a single approach among many, potentially viable, pricing strategies that your business can apply.
Everywhere around us, there are brands using a plethora of pricing strategies, and succeeding with them.
Take Starbucks, for example. The company uses a premium pricing strategy for its lattes, mochas, and signature coffee products. They are available for prices far higher than your typical coffee shop or Dunkin Donuts charges. Rather than driving customers away, this strategy has resulted in Starbucks commanding the market for premium coffee. Starbucks has become an even bigger brand than Dunkin Donuts, boasting, according to World Atlas
, a top 5 spot among the world’s largest fast food chains.
Starbucks has deliberately priced higher than competitors like Dunkin Donuts, and it has led to more, not less, Starbucks stores around the world. Starbucks consumers are unwilling to go elsewhere for their daily coffee, even if the same thing could be purchased cheaper there. Below we go over some of the strategies that retailers use in pricing intelligence, and explore how they are defined.
Rules based pricing is a pricing strategy in which prices follow a specific set of rules. In rules-based pricing, other considerations are subordinated to the set of rules that decide the price.
For example, if a product is obtained at wholesale at spot prices that vary weekly, but a decision has been made to sell at a price of cost plus 30 percent, then this can be implemented with rules. In this case the rule is tied to the variability of the costs, allowing a business to better predict the margin between its cost and price to the end consumer of a good.
Product Bundle Pricing
Sometimes, bundling products for sale together can maximize a seller’s profits or revenue. Product bundle pricing is a strategy in which multiple products are included for a single price, meaning that the customer does not have to purchase each one separately.
Product bundle pricing is not always the right strategy, especially since it often involves giving the customer a discount. In certain situations, this may not be viable for a retailer. However, there are circumstances in which it makes sense. For example, a technology retailer can bundle old technology devices with newer accessories in order to move the old stock.
Dynamic pricing is a strategy in which a retailer sets prices based on conditions in the market or a competitor’s pricing. Dynamic pricing is helpful in conditions where external factors play a decisive role in a retailer’s ability to be profitable.
This is the case, for example, in large markets where many players compete for market share. The individual retailer in such a market cannot just set the price they would like, but must factor in what others are charging, among other external factors in the final price.
Take, for instance, the case of a fresh seafood seller who gets produce fresh from the sea but competes with many other seafood suppliers. Since the product is perishable, it must be priced dynamically based on the expiry date of the product. This way, the supplier can avoid some of the costs associated with stocking an expired product. In addition, the supplier must always take into account how much other fresh produce has been brought to market, which will determine whether prices should generally go high or lower in order to clear stock.
Competitive Price Monitoring
Many retailers have discovered that competitive price monitoring enhances their overall pricing strategy. Competitive price monitoring
is not strictly a pricing strategy, but an approach to information gathering that helps the retailer collect the information that will inform their pricing strategy.
Synonymous with “pricing intelligence,” competitive price monitoring is the tracking of prices offered at competing retailers in order to optimize a retailer’s prices.
There are product categories in which it is hard to make a sale above a certain threshold of prices charged by competitors. This is especially the case when selling brand name products as a third party retailer, in markets where there are hundreds of well-publicized competitors. Competitive price monitoring is important in such situations to help retain market share.
Premium pricing is a strategy in which goods or services are priced relatively high, as part of an overall premium brand strategy. Premium pricing works best when the brand is well known and has a history of providing quality products.
This strategy has worked well for some of the best-known brands, such as Disney, Porsche, and Ralph Lauren. Their buyers like the high pricing as a marker of quality and taste.
Premium pricing won’t work nearly as well when the product quality is average or below average, or where the seller has little pricing power.
Smart Dynamic Pricing
Dynamic pricing has been in use for a long time in industries such as hotels or auto bookings
, as detailed by the Auto Rental News.
Advances in technology, however, have improved the capabilities of dynamic pricing to process vast quantities of data and account for factors such as social media indicators. The result is a pricing strategy that is smarter than the earlier forms of dynamic pricing. This is called smart dynamic pricing.
It involves incorporating data into the pricing decision in a way that often bypasses human actors. As the Auto Rental News describes, an intelligent dynamic pricing process can have as many as a million different price points for a car rental business.
Retailers who sell in multiple jurisdictions often need to price their products differently based on geography. Geographical pricing is a strategy in which a retailer optimizes the price based upon the competitive and economic conditions in different locations.
Even for a product of uniform quality, different geographical markets can respond differently. For example, according to CNBC
, Apple retailers have been pricing the latest iPhones at a discount in China. That market has unique challenges for Apple due to competition from low cost phone makers such as Huawei and others. Such challenges make geographical pricing a necessity in order for a brand to compete.
The Right Strategy for Your Business
The pricing strategy that works for each business is going to vary from one business to the next. It helps to know how the strategies used in pricing intelligence work. Understanding definitions is a first step towards that. As a next step, you can conduct more research into a strategy that looks promising for your business. For example, dynamic pricing might be viable for a hotel business, whereas product bundle pricing will be useful for software retailers or gift shops. There are many other strategies in use in the marketplace, you just need to find the one that will work for your retail business.