Pricing strategy is one of the most important factors in a retailer’s success or failure. With consumers more price-sensitive than ever, retailers must find the optimal balance between margins and sales volume. Here’s what retailers need to know about competing on price and using pricing intelligence to make smarter decisions.
The Risks of Competing Primarily on Price
Cutting prices deeply to undercut competitors can help drive sales in the short-term. However, relying too heavily on price promotions can erode profit margins and damage a retailer’s brand over time. Customers may come to expect constant discounts and become less loyal to the retailer. Competing mainly on price also limits a retailer’s ability to differentiate themselves beyond being the “low price leader”.
Setting Prices Strategically
Rather than reactive price-cutting, which is always a race to the bottom, retailers are better served by taking a strategic approach to pricing. This involves setting initial prices at competitive levels and using promotion planning to judiciously drive traffic during slower periods. Retailers should use pricing to highlight the value proposition of their products and brand. Analysing competitors’ pricing and elasticity of demand for different products can help find the optimal price points.
The Benefits of Pricing Intelligence Software
Artificial intelligence in retail industry has been a game-changer. Pricing intelligence software like Retail Express gives retailers the data and insights needed to price products competitively while maximising margins. Key benefits include:
- Real-time competitor price monitoring – tracks rivals’ pricing adjustments on specific products to inform your own strategy.
- Price optimisation – uses AI to calculate optimal prices based on costs, demand, seasonality and other factors.
- Price elasticity analysis – measures how changes in price impact demand for specific products.
- Promotion planning – identifies ideal products and timing for promotions to drive sales with minimal margin impact.
- Customer segmentation – groups customers based on price sensitivity to target promotions effectively.
- Markdown optimisation – determines ideal timing and depth of markdowns on seasonal/clearance items.
Implementing pricing intelligence tools enables retailers to price dynamically in response to changing market conditions. The data-driven approach helps retailers maximise margins while remaining competitive on price. Pricing intelligence can also help retailers optimise pricing across omni-channel sales channels to maintain price consistency and avoid showrooming issues.
Potential Challenges to Consider
While pricing intelligence delivers many benefits, retailers should be aware of some potential challenges as well. There may be significant upfront costs involved in implementing and integrating new pricing software. Retailers may need staff with data analytics expertise to make the most of more complex tools. And over-reliance on algorithms can sometimes lead to suboptimal pricing if the models lack key contextual inputs.
Competing head-to-head with competitors on price is rarely an effective long-term strategy for retailers. A more nuanced approach using pricing intelligence and strategic promotions allows retailers to find the right balance of value, volume and profitability.
In today’s omnichannel environment, leveraging data and technology is key to pricing products optimally across all sales channels. However, a pricing strategy should consider both quantitative and qualitative inputs to account for the full competitive context.