What happened lately that made dynamic pricing such a priority? Well, the answer is easy. It’s been Amazon.
We must recognize Amazon as the driving force behind dynamic pricing. Their adaptability to a vast and diverse inventory has set a benchmark for competitors to follow in their footsteps.
In this context, retailers have started to invest in dynamic pricing solutions. For a dynamic pricing tool to be set up successfully, keep a clear overview of how the new prices are decided. The retailer stakeholders, such as pricing and category managers must be involved in the tool customization process. As they will be the end users of the solution, their trust in its generated prices is essential. Price overriding from their part should happen only due to their specific business insights, not because of misunderstanding the new prices.
Pricing for retailers typically revolves between two types of products in their assortment: key value items (KVIs) and ‘long tail’ items.
The KVIs are top sellers or items which represent customer anchors – products with prices that customers tend to remember. KVIs are the most sold items which generally have low margins. The long tail items are the bulk of products and are the ones picked up and purchased here and there. The ‘long tail’ items will often be used to grow margins overall. In between these types of products, there are of course a sliding scale of other, but in a condensed down world, these are the key groups typically considered in pricing.
There are two types of modules at the base of dynamic pricing solutions: KVI and competitive response:
1. The KVI module estimates how much each product influences the perception of consumers on price. This way, the KVIs will be determined using market data, and in time it will be possible to change their status depending on the new data used.
2. The competitive response module will recommend price adjustments based on live changes of competitor prices.