A cosmetics retailer that sells a wide variety of products is constantly torn between two pricing strategies. The first strategy involves selling products at affordable prices (“everyday low price”) that provide reasonable profit margins. The second strategy involves selling products at higher prices, while applying promotional pricing throughout the majority of the product catalog. These strategies vastly differ from one another, and the retailer finds it difficult to make a decision. Which strategy will attract more clients? Which will provide higher profit margins?
Solving Pricing Dilemmas
For many businesses, pricing generates strategic dilemmas. Naturally, businesses wish to solve these dilemmas as quickly as possible. Yet in many cases, they feel they need to experience some “trial and error”. First try strategy #1, and then stop and switch to strategy #2.
Trial and error is important, yet in order for retailers to gain valuable insights, they need to conduct an immaculate process with zero deviation for a designated time frame. Sounds difficult, right? Not if dynamic pricing is involved.
Sticking to Strategy
Retailers rely on dynamic pricing to optimize prices for specific target audiences, in accordance with a wide variety of dynamic parameters (competitors, seasons, days, hours, market trends, etc.). Yet price optimization can be effectively implemented only after a general pricing strategy is determined.
Smart dynamic pricing always begins with strategy. Dynamic pricing platforms help retailers establish pricing boundaries for product categories. Once these boundaries are set, retailers can benefit from a very dynamic pricing optimization process, which helps them sell more and generates meaningful insights. These boundaries are important, because they create pricing recommendations without strategy deviation.
Choosing What Works Best
Let’s go back to our cosmetics retailer. Using dynamic pricing, the retailer first establishes the “everyday low prices” strategy for a designated time period. After recording the results, the retailer switches to the heavy promotion strategy. Each strategy is supplemented by ongoing price recommendations, in real time, based on consumer behavior, market trends and more.
After implementing both strategies, the retailer should have ample information regarding the one that best suits the business. The retailer can make an informed, fact-based decision, knowing that the “trial and error” phase was fully adaptive to a wide range of variables, while never deviating from strategy guidelines.
Comparing Apples to Apples
Most importantly, the dynamic pricing platform creates a clean comparison. Optimal real-time pricing for both strategy scenarios creates a revenue comparison that is free of unwanted variables. Metaphorically speaking, the retailer is comparing “apples to apples” instead of “apples to oranges”. Thus, the retailer can proceed to solve an important pricing dilemma – and move forward.