Why automated pricing optimization is the future of e-Commerce

The following is a guest post by Angelica Valentine from Wiser.

Pricing: it’s one of the trickiest parts of online retail.

Why? Well, not only is pricing hard to get right the first time, but it is also difficult to make sure it keeps up with the dynamic marketplace. Set it too high and you could drive shoppers away. Set it too low and you leave potential profit on the table, along with creating a customer base that is used to deep discounts.

With that said, how do you determine the best price for each of your products at any given time?

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The answer lies in data. There’s a good chance that you and your competitors have comparable inventories. This means that if you’re missing an item that a shopper wants, they could just click over to your competitor to get it all in one order. Also, it means that their prices matter a lot. Shoppers love to compare prices, so your relative prices compared to your competitors’ are especially important.

Retailers are on to pricing optimization

Retailers worldwide are catching on to the fact that their prices are relative, both when they set them and for the rest of the time that they carry those products.

Most retailers (61%) plan to use a form of pricing optimization this year. That was a big increase from the 36% of retailers who planned to optimize their prices in 2013.

As big box retailers continue to have great success with repricing their products in real-time based on market factors (also known as dynamic pricing), all other retailers will continue to feel the pressure to implement a form of pricing optimization that maximizes their sales and profit.

How to optimize pricing

1. Know your customers

You already have a lot of the data that you need to implement a pricing optimization strategy. Who are your customers and how much are they willing to spend? You can test the price elasticity of certain products that you’re introducing to the market. Pinpoint your most valuable customers and let their buying behavior influence your pricing.

2. Set a price floor

Before you get ahead of yourself, make sure that repricing will never cut into your costs. Setting a minimum price puts you in control of your pricing. Some other retailers, especially Amazon, have the ability to consistently cut prices and operate even when they are selling items below cost. Your price floor makes sure that you’ll never do that–unless that’s a part of your strategy.

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3. A/B test pricing

Once you decide the lowest price at which you’re willing to sell an item, it’s time to get to the fun part. Like in grade school, you can generate a hypothesis about which prices will do best, but ultimately the resulting data will hold your answer. There is no way to know the correct price for a product because there never is one; it’s always changing due to pricing variables such as seasonality, competitor pricing, and more. When you begin selling a new product on your website you are fully in the driver’s seat of your pricing. Your first price is an important one, as it will serve as an anchor from which shoppers will compare all other prices you post.

4. Learn from testing

A/B testing your pricing is an opportunity to learn more about your customer base and what gets them through checkout. Each time you change prices, mountains of data are produced and it contains golden insights. How many products sell at which prices and at what time? At what price point is revenue or profit maximized? Strong pricing strategies start with strong data and most importantly, analysis of that data.

5. Stay true to your brand

No retailer wants to be pulled into a price war. It kills profit margins and presents an inconsistent brand image to shoppers. Pricing plays an important role in shaping consumer perceptions about a brand. It’s important to manage the way pricing influences brand associations and always take into account pricing’s effect on brand equity, the ways in which consumers determine brand value, and strategies for managing the role of price.

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Why automated pricing optimization matters

There’s a fine line between succeeding in online retail and being mediocre.

Being uncompetitive or losing sight of the competitive landscape for even a short period of time can lead to a significant decrease in sales and profit. But keeping up with the market, collecting the data, and repricing manually is impossible, especially in real-time.

Pricing response time is key. Did you know that Amazon reprices as often as every 10 minutes? That’s why many online retailers choose to automate the process. Automation keeps retailers optimized around the clock. The market changes quickly and your pricing should be able to keep up with it.

Fixed pricing is dead, but continuously optimizing price through dynamic pricing keeps retailers relevant.

About the author

Angelica Valentine is the Content Marketing Manager at Wiser, the leading pricing intelligence suite. Wiser’s flagship product, WisePricer is a full-featured pricing and merchandising engine that monitors, analyzes and re-prices retail products in real-time. WisePricer enables retailers to grow profit margins, price with confidence and improve merchandising through powering the development of a sound pricing strategy.

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