April 16, 2020
6 min read

Using Dynamic Pricing Successfully

Our recent posts have explored the margin benefits retailers can achieve with the help of price elasticity insights, including how to generate a better understanding of an entire product line and how to price it accordingly. Differentiating a product portfolio into roles, such as common and focus items versus basic and skimming items (which we defined in our last blog on price elasticity), is particularly significant. However, once you have your base for a holistic, AI-supported pricing strategy, a few more questions arise:

  • Which product segments can best serve target KPIs?
  • Which product groups are important for marketing campaigns?
  • Which degree of automation should be chosen?

Common and Focus Items

By integrating common and focus items into marketing campaigns, and by setting prices in a way that is strategic, retailers can control the KPIs such as turnover, sales, frequency and market share in a very targeted manner.

If common and focus items – the ones customers buy most and which they are most aware of the price – are sold at competitive prices, customers will be attracted to the store. In this way, you can generate corresponding turnover and sales, and simultaneously impact store traffic. In the medium and long term, this will secure your position in the market.

Basic and Skimming Items

On the other hand, basic and skimming items are useful to increase KPIs around gross profit. This is simply because these products are not regularly the focus of your customers’ shopping trips, and thus aren’t highly sensitive to their price.

In combination with the fact that basic and skimming items make up about 60-80% of a given retailer’s total assortment, it makes little sense for pricing teams to invest significant time and effort with these product groups. Not to mention manual pricing optimization for every SKU is impossible today given the plethora of price influencing factors that have to be taken into account, such as daily stock, demand, weather, holidays, seasonal characteristics and more.

Instead, pricing for basic and skimming items should be fully automated by an AI-supported pricing software to effectively capture the maximum gross profit potential. Automating price calculation and price setting for these items is particularly effective, as it doesn’t just help set prices that align with business goals, it does it far more quickly than pricing teams can do alone.

A Holistic Strategy Makes the Difference

What’s also important is the strategic interaction of the two item groups when setting prices. If you have basic and skimming items priced by an AI, this frees up time to focus on manual price maintenance and optimization, as well as strategic planning for promotions or marketing campaigns, allowing you to make the most of gross profit potential.

From here, AI pricing software can support teams by providing price recommendations for promotions and campaigns, taking account the variety of influencing factors and conditions. In addition, a truly powerful dynamic pricing solution provides a forecast of KPI effects.

This pairing of an AI algorithm with the experience of a pricing and category team provides the optimal level of insights to make pricing decisions faster and more accurately – a consistent winning combination.