In a world where price transparency is perpetually growing, retailers need to leverage readily available competitive price data to reap the greatest benefits. Competitive price data can be acquired for many retail products, which can help to inform future pricing decisions. Without it, retailers are only looking at their own prices and demand instead of viewing the entire competitive pricing data landscape.
Current approaches for determining demand response to competitive data are limited. Many retailers build market response models (MRMs) to calculate price elasticity based only on their own prices, and then apply pricing rules based on competitor prices as a post process. This confines the models and, while it results in a rudimentary price change strategy, it too often ends up with demand neutral results. An improvement, though limited, is the use of competitor prices outside of the model to bound results.
To maximize their MRM effectiveness, Retailers can take a cue from the travel and hospitality industry who has operated in a highly transparent pricing environment for many years. This industry has incorporated competitive price data directly into their models, which provides a holistic view with richer and more insightful data. For example, global travel and hospitality company IHG leveraged this technique and saw a 2.7 percent increase in revenue for the retail segment or more than $300 million annually.
To bring this concept to life, see the example below: A retailer has not changed price for an extended period of time. The demand changes observed during that time period appear to be seasonal.
When competitive prices are also considered, then the conclusions are very different. It now seems more likely that the observed demand changes are the result of competitor price changes. Also, on a more technical note, in the second case elasticity can be estimated, while in the first case it cannot because of the lack of price changes.
Understanding demand holistically in relation to one’s entire market pricing position allows retailers to make better pricing decisions. In addition, retailers maintain the ability to apply post processing rules (though fewer times) where necessary.
Furthermore, an MRM approach that includes competitive price data can be tailored to weigh certain competitors over others. Allowing for user configuration at that level also gives retailers the capacity to group significant products or groups of products at higher levels of consideration. This will ensure that key value items are appropriately valued.
By applying competitor data to MRMs retailers will see their pricing strategies become more effective, leading to higher profits and organic revenue growth.