Value based pricing, price change frequency, marketing cost incorporation, elasticity calculation.... There is an abundance of factors to take into consideration and an unlimited number of strategies related to pricing.
Want to find out where you are leaving the most money on the table and how to maximize profits? It’s related to how often you change the price of offered products and services.
Let’s discuss price change frequency!
Price change frequency
In 2019, Spread Networks spent over $300 million to install 827 miles of fiber-optic cable from Chicago to New Jersey, reducing transmission time from 17 to 13 milliseconds.
Why spend this high amount for such a small latency decrease? Because the currency exchange traders benefit from those milliseconds. When a FOREX arbitrage opportunity presents itself, you want to act as soon as possible - timing is everything.
Think of pricing in the same way. Theoretically, any product or service has a certain selling price resulting in the highest revenue (or profit) for the retailer. This price, the pMax, depends on factors such as competitor prices, stock levels, marketing spend, and price elasticity.
These factors change quite often, influencing the pMax. When a current price is no longer set at an optimal level, it contributes to lost revenue and profit. Changing prices more frequently ensures maximum value.
Many retailers are reluctant to change prices at a frequent pace. Others think repricing applies to core offerings. This type of pricing strategy results in stagnation and an inability to regularly adjust prices in the future.
Big retail winners generally have a high rate of price change frequency. Over a week, winners changed prices related to 24% of their assortments. Whereas, others changed prices on just a limited number of products (just 9%), and it cost them...
The optimal price change frequency
Retailers benefit from changing prices more often. However, it is possible to have a price change frequency that is too rapid.
So what is the optimal price change frequency? It depends on a number of factors.
1 - Consumer Psychology
Theoretically, a higher price change frequency is better; products spend less time at suboptimal price points. But there is an adverse psychological effect related to frequent price changes.
Multiple studies and investigations show changing prices too frequently results in:
- Delaying purchase to wait for a better price
- Fixating on price rather than a product’s benefits
- Instigating and facilitating a race to the bottom (two retailers in a bidding war)
2 - Cost (implementation)
Price changes get costly when you need to synchronize prices with physical stores. To allow daily price changes in the majority of your in-store assortiment, ESLs (Electronic Shelf Labels) are going to pay off in the long term. However, if you don’t have ESLs yet, it may be better to stick with physical (paper) tags at first, and settle on a lower price change frequency that is workable in the in-store processes.
3 - Indirect Cost
Lastly, consider indirect cost, how frequent price changes influence other portions of the organization and market. If you are one of the market leaders, your pricing influences your competitors.
This can initiate higher prices (enjoyed by all competitors) or a “pricing war,” forcing competing parties to continuously reduce prices. And, the more frequent the price change, the faster the race.
Omnia helps address this in several ways, adjusting your price after multiple competitors have already changed theirs. Secondly, we leverage automating pricing, making sales more predictable.
As soon as a price change opportunity presents itself, Omnia’s automated software capitalizes on it while maintaining your set margins. This leads to more sales for each related product.
A modifying factor: price elasticity
Business owners come to understand the value of assigning a pMax to each product. However, price change frequency is counterbalanced by real-time reactions of consumers and how sales figures are influenced by price changes.
It largely depends on the industry. In some industries, changing prices are common, even anticipated by customers, such as with airplane tickets. In such industries, owners expect less of an adverse reaction to price change frequency.
The price paid for not assigning a pMax depends on price elasticity. If a product has a low price elasticity, the effect of being outpriced/overpriced has little effect on volume. However, if the product has a high price elasticity, a small price change will have a large effect on volume. You want to change the price of these items more frequently.
Omnia best practice
Given the analysis outlined above, as well as our own experience from helping retailers optimize their pricing for the last 10 years, we have come to a range of frequencies that we believe is the best.
As a general rule at Omnia, we recommend changing prices: at least 1 time a day and at most 4 times a day.
Eager to find out how Omnia can help you determine your optimal price change frequency? Or if you want to discuss how we can advance your pricing strategies with our software - please let us know by contacting us!
Lupko is Consultant at Omnia Retail. He holds a MSc degree in International Management (cum laude) from ESADE Business School.