Pricing isn’t easy to get right, even for the most experienced retailers. It’s arguably both an art and a science.
The market is dynamic, and what was once a viable strategy may no longer be producing the results you want. You might see this manifest itself in depleting margins, poor return on ad spend (RoAS), frequent out-of-stocks, and more. It’s critical to be proactive about identifying when and what changes you need to make to stay ahead of the game.
Here are some of the most common reasons why your pricing strategy may need an update:
1. Working with inaccurate competitive pricing data
How often are you monitoring and benchmarking against the competition? Retailers are repricing frequently, and if you’re not near or at that pace, you are likely missing out on opportunities to capitalize on these changes.
For instance, human error can come into play if you’re relying on manually collecting data. It’s also much more time-consuming than automating the process, which means by the time the data is aggregated, you’re already late to the party. Automated data collection can help tackle both these issues.
2. Changing prices uniformly across your product catalog
Different products or categories have different price elasticities and require different pricing strategies. Demand for some products will change when a competitor changes their price, but not always. Pricing is more complex than that; while competitive pricing is an important component, it’s not the only one.
Sometimes it doesn’t make sense to match a competitor’s low price and you may even find opportunities to raise prices instead! For example, Amazon does not have the lowest price on everything—they have some loss leader products or categories but make up the margin in other areas.
3. Using an overly simplified pricing model
Gone are the days of simple cost-plus pricing. There are so many variables that can impact pricing, such as seasonal fluctuations, competitor pricing, and more. And they will all vary for different products.
Price testing to determine how price changes affect demand is one common but critical action to take. You’ll want to be very careful about changing prices on price-sensitive products, but you can also find other opportunities where you can raise prices without influencing demand. By performing these kinds of tests and analysis, you maximize sales and margins at the highest price consumers are willing to pay.
4. Poor communication between teams
We all know about the “4 P’s” of marketing: product, placement, price, and promotions. Everything clicks into place when all four are aligned and working toward the same goals.
In retail, marketing and merchandising teams have ownership over these pieces, with marketing typically handling customer acquisition and merchandising handling the product strategy. These two teams must have a single source of truth to maintain a seamless relationship to make better informed and aligned strategic decisions and effectively integrate workflows. Sales can be negatively impacted if this is not the case.
For example, let’s say that the marketing team is allocating a high amount of advertising spend on a particular item at a price that’s too low. There will likely be a noticeable increase in demand that can lead to out-of-stocks, putting pressure on the merchandising team and resulting in lost sales.
5. Not maintaining good price to value
Perhaps your pricing is competitive but you’re still losing sales to competitors. One reason may be that you’re not providing the same value or incentives that your competitors are at the same price point. For example, 88% of online shoppers prefer free shipping to fast shipping. Make sure to not only monitor competitor pricing but other incentives that they may be offering.
6. The timing is wrong
Promotions are a great way to increase sales. However, you’re not maximizing the impact if the timing is off. You’ll want to take a look at what past promotions performed well and when to help plan future campaigns and predict consumer behavior.
Competitive promotional intelligence is also important to incorporate into your strategy. You may spot trends such as:
- Promotional frequency
- Type of promotions
- Promotional sources/mediums
- and more!
By learning from the past, you can predict the future and proactively plan to one-up them to create more compelling promotions delivered at the right time.
The underlying theme here is the importance of making data-driven pricing decisions. If you have difficulty depending on your pricing strategy or are going by a gut feeling, you aren’t being data-driven. The first step is admitting there’s a problem.
The next steps are identifying the sources of the problem and instituting corrective measures. Remember, price optimization is an ongoing process and will require adjustments over time, but by putting key processes and structure in place, you can stay ahead of the competition with a more proactive approach.