“Pricing is actually very simple. Customers will not pay a penny more than the true value of the product.”
Retailers are finally realizing that successful sales come through pricing your products in a way that justifies its value. Today’s marketing trends are shifting away from giving discounts and leaning more towards authentic product pricing.
According to Idol, Chief executive officer of Michael Kors Holding Ltd, consumers don’t care about the pricing as much as they care about the product. If one has the right product, pricing it at its real and authentic value is all it will take for it to be a success. This has proven to be true as the best selling products in the last quarter were Mercer handbags and smartwatches, all of which were sold at full price.
To attain that right price is very crucial in today’s world and one way to do that is pricing optimization. Turns out, Zara stands to be a long-term success example of the same. Zara has a dedicated team of designers and product managers to ensure an efficient system to replenish existing items in as little as two weeks, enabling the company to produce exactly what the customers want.
For Zara, to price their product is paramount, because this not only leads to profits but also helps them manage inventory, reduce market downs and achieve higher gross margins.
Why should you go for price optimization?
Price optimization allows a company to fully exploit what consumers are willing to spend, when they spend and how they spend. These consumer buying habits, when analyzed and used properly, allows a company to maximize profits in new and versatile ways than simply judging the success of a product based it’s on its past performance.
Here is why retailers need price optimization-
- Don’t shoot blanks with proper pricing optimization.
Back in the day, on a particularly difficult shot, a shooter would shoot and hope for the best. That’s not the case today. No shooter today would be expected to completely eyeball its target. The same goes for pricing. According to a Forbes article, companies like Amazon adjust the price of their products a dozen times a day to maximize product competitiveness. The same is being adopted by retailer giants to skyrocket their business growth.
- Airlines that didn’t optimize are no longer with us.
Airlines are some of the most avid users of price optimization. They pay attention to the date of departure, the date of purchase, time left until the flight, buying location, affluence level and any other info they can get their hands on. Depending on all these factors, the price of flight tickets can fluctuate dramatically. If an airline fails to keep up with its competitors, they are likely to drown soon.
How is it done?
After having given you enough evidence on why pricing optimization is important, here are some points on how it’s done-
A research highlight article in the Fall 2017 issue of MIT Sloan Management Review by MIT Professor David Simchi-Levi describes new insights into demand forecasting and price optimization.
- Algorithm increases revenue by 10 percent in six months
Simchi-Levi developed a machine-learning algorithm which was first implemented at online retailer Rue La La. The goal was to cut inventory, but what the company ended up with was a cutting-edge demand shaping application. The challenge faced by Rue La La was pricing on items that had never been sold before. So they required an algorithm to set the price for the first time. Within six months of implementing the algorithm, it increased Rue La La’s revenue by 10 percent.
- Forecast, learn, optimize
Three steps were involved in generating better price predictions-
- Matching products with similar characteristics to the products to be optimized. A relationship between demand and price is then predicted with the help of a machine-learning algorithm.
- Testing a price against actual sales, and adjusting the product’s pricing curve to match real-life results.
- A new curve is applied to help optimize pricing across many products and time periods.
The ability to automate pricing has enabled companies to optimize pricing for more products than most organizations find possible.
Wish to know more about how product price optimization can benefit your retail business? Contact us at Datahut, your big data experts.