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Price optimization: a guide for retailers
It’s no secret that shoppers are always looking for the best deal possible on the items they want to buy. Although it’s usually good to offer the most affordable price they can, retailers need to be aware of how delicate the balance is between their pricing and consumers’ purchasing behavior. Offering the lowest price doesn’t always lead to the best results. For example, some shoppers may be suspicious of a price that’s too low. In certain cases, a price that seems reasonable in a brick-and-mortar store could seem out of sync with what’s being offered online. Retailers need to know about price optimization and have a strategy for it.
What is price optimization?
Price optimization refers to the practice of analyzing data about consumer behavior and using it to adjust the prices of goods and services to maximize sales and profits. If performed properly, price optimization can offer significant benefits to the retail stores that follow this process. It can also help them adjust their prices much faster in response to their competitors’ actions. Additionally, it can enable retailers to strike a better balance between revenue and profit. That’s because they can lower prices just enough to spur more sales without cutting as deeply into their profits.
Having a system for optimizing prices can give retail businesses an advantage because it helps make pricing more efficient and scalable. This is especially true when it comes to omnichannel pricing, which is far more common today.
Understanding the price optimization process
The process begins by establishing objectives, whether it’s growing revenue, increasing market share, or boosting profitability. Optimizing prices requires a strong foundation of information. This includes traditional data such as purchase histories and profitability analyses, as well as softer information that comes from customer surveys.
Once all the right information is collected, it’s time to begin putting it to use. This typically takes the form of testing with special promotions using adjusted pricing targeted at a specific demographic that can help provide the best representation of the broader customer audience. For optimal results, it’s important to run all the data collected from these tests through AI and machine-learning software that can identify the effects various prices have on the specified metrics. If the desired results are achieved, the methodology can be transferred to other audience segments for further refinement. If not, the tests can be run again with adjusted pricing.
Slashing prices to the bone can be one way to attract more sales, but it doesn’t necessarily lead to greater success overall. To learn more about how price optimization works and what it can do for your organization, take a look at the accompanying resource.
Infographic created by Clover, a POS system company