In April of 2017 Bob Hetu from Gartner Research blogged that “retail pricing strategies are still not optimized.” The blog, which was based on his market research (subscription required), identified the five stages of pricing, and argued that failure to reach and implement the fifth stage in the pricing journey would result in “failure to achieve the significant business benefits derived from more complete adoption.”
The five stages of pricing maturity run from manually calculating prices by hand all the way through AI and machine-learning generated pricing.
Stages 1-3: Manual Based Pricing
Throughout most of the last century, pricing managers calculated their prices by hand. They took the wholesale price of the merchandise, added their strategic margin to it, and placed the item on the shelves with a price tag. Promotions or competitor pricing occasionally impacted the price of goods, but for the most part, the process was fairly simple, static, and still employed by some companies today.
The first computer spreadsheets arrived on the market in the mid-80s. Using tools like Excel, pricing managers were able to generate pricing using formulas that they programmed into the system. While the calculations were automated, pricing managers scanned competitor ads, and walked through competitors stores to compare their prices to the competition. There was an element of digital transformation in their pricing calculations, but it still required a large amount of manual input. Many retailers still find themselves using spreadsheets and manual inputs to generate their pricing.
Most of today’s retailers find themselves stuck in stage 3. Using Excel or other comparable calculators, they can create different price points for different areas. They factor in their competition’s online pricing into their calculations, as well as look at different distribution channels. However, much of the calculation requires manual inputs to add pricing data into the calculations.
Stage 4: Price Optimization
For Gartner, introducing rule-based pricing models across channels and pricing zones is key to companies looking to derive the most business benefit from their pricing model. However, this is also the place where most price transformation programs stall.
Developing rule-based pricing requires more than base prices, promotional prices and markdown prices. It takes competitor pricing into account, as well as consumer behavior patterns.
In developing rule-based pricing, organizations have the opportunity to develop a true pricing strategy that is carried out through all their products sold, rather than just the more popular items. Strategies can include premium pricing, market penetration techniques, economy pricing, bundle pricing, discount pricing, or any other pricing way of establishing a price. Users can also apply discounts to specific items or product categories based on seasonal promotions, changes in the market, or other compelling event.
Once the rules governing the strategy are entered into the dynamic pricing engine, the system begins recommending prices for each item. Pricing managers can review the recommendation, and either accept or override the recommendation.
Throughout the dynamic pricing process, the pricing manager retains control of published prices, as well as ensures that the strategy is delivering on the company’s financial targets.
Stage 5: Artificial Intelligence and Machine Learning
As pricing models mature, businesses can achieve increased benefit by introducing AI and Machine Learning processes into their pricing models. Algorithms can analyze customer patterns, with the system presenting optimal pricing for each online opportunity.
According to Gartner, this is the stage where retailers derive the most benefit from dynamic pricing. The advanced algorithms and machine learning tools compute and recommend pricing based on advanced market data, including inventory, retailer sales, and market share.
The Challenge for Business
The digital transformation that’s changing the way businesses establish a price presents a frightening world. Instead of relying on long-time trusted Excel sheets, businesses need to put pricing in the hands of a technology they don’t fully understand.
However, as Gartner has noted, adopting a dynamic pricing model is critical to your future success. You’ll have the opportunity to fully develop pricing strategies and give you the edge against your competition in online price wars. Advanced pricing technology offers the promise of higher overall profits, which makes it difficult for any healthy business to pass on.