No matter what channels a retailer sells on, their pricing is one facet of the selling experience that can’t be stagnant. With competitors just a click away, and comparison shopping engines making it easier than ever for consumers to find the lowest price, having that competitive intelligence on hand and taking action accordingly is a requirement.
Online pricing optimization is a way for retailers to understand where they fall within their competitive landscape and make changes to their prices over time to make sure they maintain the price position they deem best. That may mean lowering prices to beat a competitor temporarily, or maybe matching their prices, or even boosting prices higher to avoid an out of stock situation.
At its core, price optimization helps retailers attain the goals that are most important to them. That may be raising prices when possible to optimize profit. Or lowering prices to improve revenue and sales volume. Whichever goal a retailer has in mind, pricing optimization can help them get there. As these goals change over time, automated pricing optimization tools can help rework those strategies and implement changes quickly.
Let’s go over the most important aspects of online pricing optimization.
Stagnant Prices Are Best Avoided
Prices that are too high create a lag in sales. If shoppers can find a better deal elsewhere, there’s a good chance they will take the opportunity. The original retailer will not only miss out on the same of the initial item, but any other cross-sells that the shopper may have put into their virtual basket. A price that is too low may spur sales, but in the end, brand value will take a hit. Converting shoppers based on bargain basement deals will condition them to expect that tier of pricing and may even tempt them to wait for discounts instead of checking out at full price later on.
Pricing Optimization Has Many Moving Parts
While competitor pricing is a key factor in pricing optimization, there are many more that retailers need to take into account in order to have the best price in any given moment. These factors include: inventory levels, price elasticity, and seasonality.
Inventory levels are a key factor to account for because dropping prices to take market share from competitors is only a sound strategy if you have enough inventory to fulfill the increased orders coming in. Once inventory starts getting low, it is best to boost that price up to preserve what is left until supply levels are replenished.
When it comes to price elasticity, retailers should optimize prices on items that have some flexibility. Certain products must have relatively stable prices to keep demand high, while others have fluctuating demand based on product type, category, and more. Price optimization on elastic and inelastic products can operate quite differently, so keeping track of how price changes impact sales is the best way to determine future pricing strategy on those items.
Lastly, seasonality must be taken into account to make the most of the high seasons for certain items. For example, pool supplies may be mainly purchased from late spring to early fall. Those popular months are the time to be competitive, while also maximizing margins before sales slow down for the year
Pricing Optimization Takes Time
There is no magic bullet to arrive at the perfect price. Each product and category are different. In order to find the best price for a product, there is significant price testing that must take place. Is it best to price within a few cents of competitors or should you offer better shipping and returns to make your higher price more valuable? These two questions and more can be answered by testing prices over time.
Pricing optimization and price testing go hand-in-hand. An optimized price means that you have tried multiple prices and found what really works. But over time this price might change. Demand may wane or a trendy item might fall out of the spotlight. Staying aware of the relationship between pricing, sales, and consumer sentiment will help you weather changes in the market.
There are many ways that retailers can put pricing optimization strategies to work. Depending on the company size and SKU count, some retailers are able to accomplish this manually. But for the vast majority of larger retailers, automation is required to not let anything slip through the cracks. Whether a retailer chooses to set specific rules to reprice when certain conditions are met or lets an algorithmic repricer determine the best price, getting access to market data and taking action on it is the best place to start.
Want to learn about how pricing optimization works in-store? Download our guide.