Love it or hate it, the emergence of price transparency has irrevocably altered the competitive landscape. In fact, you’d be hard-pressed to find a market where vendors are able to continue to rely on opacity in their pricing.
Sure, buyers might not know your costs, but the internet has made it easier to compare your prices with those of your competitors. As such, decision makers are increasingly turning to a dynamic pricing strategy to boost sales.
Why Dynamic Pricing?
As the name implies, dynamic pricing is a way to frequently and rapidly adjust prices depending on market conditions. While Amazon is well-known for their use of dynamic pricing, they are not the only high-profile use case. In fact, many elements of dynamic pricing are at play in the “Surge Pricing” tools made famous by Uber.
Why have these companies shifted to dynamic pricing? The answer is that dynamic pricing allows them to undercut their competitors on items where price transparency has the greatest impact while maintaining margins on those SKUs (Stock Keeping Units) which are less sensitive.
In fact, the success of Uber and Amazon is a reason why companies are shifting their price strategies regardless of the channel. However, this has also brought to the forefront what is known as the “Black Box” problem, which happens when end-users don’t really understand how the underlying algorithms of a dynamic pricing model work.
While the “Black Box” problem can manifest itself in a few ways, the most common is an output which delivers a price recommendation which deviates significantly from current price levels. In fact, this trust barrier is a reason why category and pricing managers need to be involved in the development and implementation of dynamic pricing models.
McKinsey found that such coordination can lead to revenue growth of between 2 and 5 percent per SKU. While this might not sound like much the impact of the right price levels across product categories, it can have an outsised impact on the bottom line and lead to higher levels of customer satisfaction.
How to Increase Sales
For most retailers, their Key Value Items (KVI) are among the most-search SKUs in their catalogue. As such, they tend to account for the lion’s share of their revenue. However, failing to properly price KVIs can lead to lost sales – either through abandoned checkouts or less than optimal prices.
Given the importance of KVIs, companies often rely on market data to determine customer price perception. Yet, this data only paints part of the picture when it comes to avoiding lost sales. As such, decision-makers need to develop a framework which collects and unifies across multiple dimensions. This includes long-tail items (i.e. non-KVI items), price elasticity, competitor pricing, and finally omnichannel – even if you are in the brick-and-mortar space you are competing with e-commerce channels for the same customers.
Combined, this data not only assists in the development of a competitive price strategy and its objectives, but it also provides a blueprint for implementing adjustments along the way. The result being: you can increase the size of your average sale through the right mix of price increases and upselling.
However, this is not a one size fits all solution. In fact, the “dynamic” in dynamic pricing means that the framework must be able to adjust based on the context – be it seasonality or a new product introduction or even changes between markets and geographies. Only in this way can you capture the insights needed to increase sales.
How to Put Dynamic Pricing into Action
Given the benefits of dynamic pricing, you would think that every organisation has embraced this approach. However, this is only half true. Yes, many organisations have adjusted their pricing models to be more reflexive but, in most cases, the result is an approach to pricing which is less than dynamic.
While the reasons vary from organisation to organisation, the most common barriers to the implementation of a dynamic pricing strategy include failure to involve key stakeholders in the development process and to provide adequate training once the system is ready.
What does this mean for you? For starters, spinning dynamic pricing into a competitive advantage requires a holistic approach. More importantly, there still is time to get it right. Sure, e-commerce companies popularised dynamic pricing but that doesn’t mean it is game over for brick-and-mortar retailers. But you can learn from the mistakes committed by others and turn that knowledge into a competitive advantage which will help you not only avoid losing sales, but increasing long-term profitability.