Source: Google Shopping
Do retailers need to make price optimization a priority right now?
Through a special arrangement, presented here for discussion is an excerpt of a current article from the blog of Aptos.
While price transparency was tough for retailers pre-pandemic, the challenge has only intensified as personal financial strain and economic uncertainties place even greater emphasis on price during purchasing journeys.
Here is a reminder of why price optimization needs to be a top priority for retailers in 2021:
The impact of price on demand (and the role of elasticity) cannot be ignored.
The fastest way to generate demand is with pricing. When a product’s price goes down, sales go up. Considering price elasticity adds some complexity. If a product is elastic, price changes have a higher impact on demand. If inelastic, price changes have a relatively low impact. An AI-powered price optimization solution effectively calculates millions of elasticity values and dynamically adapts as demand shifts. The result: more value generation, improved forecasting capabilities and the optimal balance of price increases and decreases to drive profitable demand.
Will dynamic pricing be your competitive advantage – or your competitors’?
Adoption of dynamic pricing, riding the online shift, is likely to be accelerated by COVID-19. Yet the benefits can only be fully realized if you move faster than your competition. If your competitor can change prices every day of the week and you only change them weekly, you will lose an entire week of price perception before you can react. While you shouldn’t make huge pricing shifts, small changes should be able to be made quickly. Improving your price perception is highly dependent on your capability to price more frequently than your competition.
Controlling your price perception starts with a centralized strategy.
The global pandemic makes it necessary for pricing best practices to be more urgent, more actionable and — most of all — more strategic. While a lot of lower-priced discounters and premium retailers put strategic emphasis on how they want to be positioned in the market and price accordingly, many more retailers struggle with establishing a pricing identity. A centralized strategy with strong leadership, adoption and governance can drive improved price perception while achieving financial objectives at the enterprise level.
Discussion Questions
DISCUSSION QUESTIONS: Will the COVID-19-driven shift to online shopping accelerate the adoption of dynamic pricing and use of price optimization tools? What do you see as the advantages and potential challenges of using such technologies to address consumer demands for pricing transparency?
Poll
BrainTrust
Lisa Goller
B2B Content Strategist
Ralph Jacobson
Global Retail & CPG Sales Strategist, IBM
Whether we know it or not, dynamic pricing is possible now, both online and in-store. Most retailers have not built the systems and technology infrastructure to implement it in-store. We manufacture price tags today that identify the item. We don’t need to put a price on the tags; we can display the pricing in electronic display tags and, because most retail stores are connected with their corporate systems, pricing can be changed from the corporate office by store, and by time of day. The danger is that it will confuse the customer base (as do the airlines) and the full impact may easily be more negative than positive.
As e-commerce explodes, more retailers will embrace pricing tools to stay competitive, agile and tempting to consumers.
Pricing tools are timely, as shoppers expect deals this year and will shop around online. These tools help retailers promptly adapt to fluctuations in consumer demand and rivals’ prices. They’re also flexible, allowing retailers to offer deep discounts or protect their margins.
Yet smaller retailers may not be able to afford these tools, making them less prepared to capitalize on today’s online shopping boom.
It has always been a retail mantra: “I want to sell more, let’s drop the price.” If this really works, there are two big wins for retailers.
The first and most important is to distinguish what products are inelastic and you should never drop the price on them no matter what the competition does. The second is almost as important. Know how low an highly elastic item can a price be dropped until it becomes inelastic, no matter what the competition does. And the corollary of course is, on those inelastic products, can I increase the price?
I think it will accelerate the adoption of price optimization tools as pricing will continue to be the focus moving forward. The issue will be that if most of your competitors adopt the same technology, then service, out-of-stocks and all the other logistical problems that are still a source of frustration for shoppers will be the point of difference when price is at parity with the competition.
Matt has convinced me that pricing is now as important as it has ever been. Competitive pressures, new shopping behaviors, lower foot traffic, and slower turns have all conspired to make pricing a critical strategic tool in merchandising’s tool kit. I interviewed Matt for a webcast a couple of weeks ago, and he made the point during our conversation that the first step to better pricing is creating well-balanced pricing teams. He recommended investing in better team design to ensure the proper ratio of pricers to categories as a critical first step to more strategic pricing decisions, and I think he’s right.
Price optimization can be very effective but it is not just a tool. Before the software can drive value a company must create/align on its pricing strategy, develop a resource plan to support it as well as creating a change management plan to ensure success. So while it can and should be a priority companies need to be aware that there is so much more that goes into a successful implementation.
The great acceleration brought on by COVID-19 only increased the need for a dynamic price optimization strategy. Establishing the right pricing and promotional strategies are key in this hyper-competitive marketplace, where the consumer has multiple options at their fingertips.
Retailers and DTC brands have to take a proactive stance, and dynamically flex their pricing around the consumer demand by not only looking at historical data but also recency, since we are living in such uncertain times. The right pricing tools enable and empower merchants to plan accordingly, but also read and react to the changing demands by making strategic shifts on key and everyday items.
While price is always important in retail, what is now critical is having good availability and standards in the store. Price optimization has traditionally been complex and difficult for retailers to get the best out of, with many solutions becoming shelf ware.
It is important to have a strong price identity – if that is your main strategic positioning then you have to make sure your customers know that and you need to live by it. This is about price management and making sure you have good visibility of your competitors and adjust your prices accordingly. Setting prices and understanding what items have a high or low elasticity can be important in positioning product pricing to protect that strategy but changing prices too frequently can adversely affect the way you are seen by your customers. Do not try to get too clever or you will confuse them and lose confidence in your brand.
Does COVID-19 make pricing more important? Certainly people have less money and will be looking for the best prices, but they are also going out less and do not want to be going from shop to shop. It is the overall price perception that is important. If the first wave is anything to go by, having the stock on the shelf will be the prime mover.
It depends. If you are selling commodity product that can be purchased from any number of retailers/sources, then the price is the prevailing online lookup, probably first at Amazon, and then increasingly with Google Shopping. The concept of zone pricing, store/part day pricing becomes more difficult, as you can’t afford to be higher than the “market makers” (and being lower gets pretty margin challenging).
That takes a certain amount of the functional needs out of the game, and reduces the requirement for some of what optimization technology has traditionally supplied. Hyper-personalized price offers on the other hand on a one-to-one basis to a known consumer starts to make a lot more sense. That’s a different branch of the optimization game.
If a retailer hasn’t adopted dynamic pricing (at least online) and advanced pricing technology, then for years they have reduced the sales and profits of their most successful lines and enabled their least successful lines to burn unrestrained holes in their bottom lines. The most successful retailers today use dynamic pricing powered by advanced technology — period.
There’s a balance between price and experience. The lower the price, the worse the experience a user will put up with from discovery through delivery. To not have elastic pricing means e-tailers have to create added value to justify not being price competitive in the moment of discovery.
COVID-19 doesn’t impact everyone the same way. Swaths of people are still buying $300 shoes while big tranches of others try to piece together a budget to hang on to their home and feed their families. Those buying experience want emotional fulfillment while those trying to survive are buying to survive. Bottom line: elastic pricing is not one size fits all and needs to be evaluated by vertical and customer base.
I don’t believe COVID-19 is really driving a decision to implement the pricing strategies mentioned in the article. It just created a different buying pattern where pricing strategies can be helpful to manage sales and inventory levels. This, along with reasons mentioned by our colleagues who have answered this question, is a reason to implement pricing strategies (COVID-19 is not).
At the retail level we’ll see less investment in price optimization – unfortunately. The market tightens available spend and precautionary measures in stores for COVID-19 are gobbling up any residual cash and profits that are realized. Retailers won’t see the results of price optimization instantly and therein lies the rub. Most retailers will be more focused on marketing, discounting, and traditional, well-established mechanisms to drive sales, especially holiday sales. Price optimization can be immensely valuable, but it won’t be moved to the top of retailers’ focus pile. For the pricing transparency aspect of the question – if anything, price optimization separates customers through deterministic segmentation. This will introduce less transparency rather than more for customers, especially for dynamic pricing. However techniques will be introduced that can capture personalized price points over time – just the opportunity is limited for consumers to see gains, and hence adoption will be slow. It’s smart technology, but not yet ready for the mainstream, especially as customers are wondering why their neighbors were able to buy their hand sanitizer at 30 percent below their costs.
If COVID-19 is the catalyst for deeper penetration of price optimization technologies, that’s cool. I remember comparing the three most prevalent systems, including DemandTec back in 2002, prior to its acquisition by IBM and its subsequent sale. These technologies are employed by a surprisingly small number of retailers. This tech is game changing and I think it deserves evaluation in most companies.
Dynamic pricing is already widely known and adopted in the eCommerce industry, in some verticals more than others of course. There is nothing new to flights with dynamic pricing — lots of electronics retailers have been using these technologies for years. I do believe that some sectors are going to make use of this to their advantage to drive more sales and as a second-order effect this will cause rapid adoption by the sector or vertical they operate in. However, the digital experience, brand identity, and retail experience are not always aligned with dynamic pricing. I also see some technical challenges as lots of retailers have still outdated systems in place which makes it harder to quickly adopt real-time pricing engines.
Mr. Pavich seems very enthusiastic — indeed this reads like an academic paper (where a large number of assumptions are made and reality is mostly ignored) — but IIRC the sentiment wasn’t generally endorsed; translation: people HATE “dynamic” pricing and whatever (likely small) gains in sales or “intelligence” gathered will be offset by implementation problems and PO’ed customers.
No, we don’t all need to pay $1.26 just because our parents did, but having a different price 5 minutes later when we come back to buy something isn’t optimal either. So that’s my 2 cents … no 3 cents … 5 cents….
With Amazon reportedly driving 25% of profits based on dynamic pricing leadership, combined with the reality of price transparency in today’s digital world and open source technologies to enable this capability for “the masses” — there’s simply no excuse for dynamic pricing not to be a core strategy and competency for all retailers.
Dynamic pricing in e-commerce is common now. It can be applied with systems in-store but, as many have mentioned, tagging tends to be the issue en masse. Electronic display/shelf tags are the best option which I expect will increase in popularity as 5G becomes more mainstream as has happened in many parts of Asia.