Winning with Price

Understanding some of the building blocks for delivering a customer-focused and sales-focused pricing strategy for retailers

Pricing is undoubtedly the major factor that affect the sales of a product in a store or online. The consumers look at the product price as the key factor that influences their purchase. With the widespread use of e-commerce websites and google searches, it is very easy for consumers to do a price comparison for the product they are purchasing, and consumers will almost always go for a lower price product if the same product is available at a lesser cost elsewhere.

For brands or manufacturers, the right pricing is extremely important since this directly affects their sales and profits. There is always a margin that is made on any product, and optimizing it in a way that does not affect their sales as well as provides an incentive to the customer to purchase the product is the key to success. For a new product launch, or providing discounts to dispose of the old products, the right pricing is an absolute must for a product.

What is Price Optimization?

Pricing optimization is a data analysis technique that deploys multiple machine learning models to arrive at the right price of a product incorporating algorithms and data related to demand forecasting, customer product purchase propensity, competitive product benchmark, and behavioral analysis, to start with. Various other factors like customer segmentation, price elasticity, seasonality and purchase trends, store location, etc are also incorporated to build a robust model for Initial pricing, promotional pricing, and discount pricing

Why it is needed?

Imagine a retailer selling apparel and shoes, in an organized retail format inside a shopping mall. There are multiple shops that sell similar products, and the competition to make the customer purchase is intense. You cannot just rely on your ‘loyal’ customers since if a customer gets the same product at a lesser price, it won’t take him/her more than a minute to switch his/her loyalty. This is why the retailer must ensure the prices are less.

But how will the retailer make money if they reduce their price to the absolute minimum? If the retailer squeezes their margin to the max, there is no way they are going to sustain their business. Also, there are products from last stock that have to be cleared, plus some new products that need to be sold to the customers. In case of a sale or a festive season, customers will look for promotions on the products. Managing all these processes and pricing is a complex task in itself. In the case of bigger retailers or e-commerce sites, this is a bigger problem since they have thousands of products

Price Perception by the consumers

If you are selling a high-end car like Lamborghini Huracan, and offer a discount of $2,500 on the car (which costs $500,000), it is unlikely to create an impact even though it’s a lot of money for some. For a BMW, customers might take the discount but it not likely to impact his/her purchase decision even though it is 5% of its sale value of $50,000. For a customer buying a car worth $20,000, even a $1,000 discount is great, and a discount of $2,500 will definitely influence his purchase decision.

This is an intuitive example — a customer buying Lamborghini probably does not care at all about discount since this is a premium product. A BMW buyer is a mid-market-premium customer, and he may or may not be influenced by a discount. A customer who is buying a cheaper car probably values discounts more, and it is a deal maker for him.

The same is true for any retail store. You need to understand your customers' perception of prices and products before offerings for any discounts. A price-sensitive customers (which may comprise 30–40% of your customer base but contribute 10–20% of your sales) will NEED discounts, while customers purchasing premium products (which may comprise 10–20% of your customer base but contribute heavily to sales) may not be interested in discounts but more interested in product quality. You need to take care of both types of customers while making sure you make money as well as engage the customers too!

Building Blocks of Pricing Strategy

The Pricing Curve

The pricing curve is used to ensure the retailer beats the competition by being the cheapest on the price for a selected list of important products. The Pricing curve works on the principle of “Do not get beaten on the price of the most important products for Price Sensitive customers”. In order to achieve this, the retailer needs to track competitor prices for these products.

Price Stability

Price Stability is a measure of how stable has a product been in terms of its Price. In the real world, prices fluctuate a lot due to reasons ranging from Price cuts to Promotions to Seasonality, etc. A stable product would be the one which shows the least number of Price changes in a reasonably long time frame. Since Price Sensitive (PS) customers are the most important in deciding the Price Image, it is important that the products which appeal to this group of customers display stability in terms of Price

Price Change Brackets

• <-5%
• -5% to -2%
• -2% to +2%
• 2% to +5%
• >5%

Price changes in the range of -2% to 2% are considered to be stable

Super Core and Core Products

Identify categories and department as Super Core and Core: This is purely a product segmentation based on how the customers are buying the products, as well as how much the product is contributing to the sale. The key thing here is the fact that it takes into account both the customers as well as sales, which are equally important for any retailer

Once we classify products into these categories, we know which are the important products for the retailer and the customer. This is done category by category, department by department to get a very deep understanding of the Super Core and Core segmentation

Product Segments based on Price

Price Sensitive segmentation allows us to classify our products based on the monetary value — which is of utmost importance to customers. The product prices in a subcategory (similar products) need to be normalized to plot them into a Gaussian distribution, and segmented based on their deviation from the mean (1 standard deviation on either side). This is also a key component of building a price-sensitive segmentation

Rebalancing investment in price and improving price perception

Build margins and profits where you should, without affecting the price perception for customers for whom pricing is everything. This is done after benchmarking the price of your products with the retailers