Within our Retail practice area, we covered the dynamic pricing topic and what it means for retailers and the retail industry, but what does it mean for your business? Is dynamic pricing right for you?
It’s important to note that, not all dynamic prices should be treated equally. The truth is your company may not need to compete with Amazon’s hourly price changes.
To determine whether dynamic pricing is necessary, retailers must first size up their market and the competition. Is consumer demand so volatile that you need to change prices as often as Amazon? Or are you in a more stable environment where primary competitors keep prices the same for months, and use a mega sale every quarter to move merchandise? The answer could be a combination of both, varying by category or product.
Retailers need to tailor dynamic pricing to their needs. They can start the customization process by evaluating the following four factors:
- Defining your segmentation structure: Segmentation allows you to take your portfolio of products and break them into smaller, actionable chunks based on sales channel, region, competition, customer buying behavior (demand & price sensitivity), price volatility, etc. This is a critical first step since analytics modeling will leverage this segmentation structure to predict demand, measure customer price responsiveness (in relation to competitor prices), identify customer trade-offs, and recommend optimal prices.
- Identifying primary and secondary competitors: Based on your segmentation structure, you can answer questions such as: who are our primary and secondary competitors? How does this vary by region or even time of year? After identifying your competitors, you can also weight their level of impact on the final price recommendations (e.g., Amazon = 80% and Macy’s = 20%). Setting your competition group is one of the easiest ways to customize your dynamic prices.
- Establishing business rules: This is one of the most essential elements to customizing dynamic prices because business rules allow you to artfully blend the science behind dynamic pricing with business reasonability checks to ensure price recommendations align with corporate objectives. For example, do you have certain regions where you are currently in a market penetration strategy and want to be more aggressive with prices to drive volume? Or do you have certain products that you view as premium and want to set strict minimum allowable prices to maintain a healthy margin? Business rules allow you to tailor price recommendations to fit your specific needs.
- Determining your required refresh cadence: While you may be competing with Amazon, do you need to change your prices daily or even hourly? For most of your products the answer is likely no. That is why it’s vital to establish a refresh cadence that balances contending with your competition and satisfying your customers’ needs. It’s also wise not to turn away or annoy your customers with prices that change every hour.
It’s essential for retailers to work collaboratively within the organization to define its approach to dynamic pricing. This will ensure the solution meets business needs and helps to drive organic revenue growth.