Price Points by Omnia Retail

This week we have a guest post from Johan Maessen, owner of Commercieel Verbeteren. Johan has over 10 years of experience in strategy consulting, and works tirelessly to help businesses grow with deliberate, strategic...

This week we have a guest post from Johan Maessen, owner of Commercieel Verbeteren. Johan has over 10 years of experience in strategy consulting, and works tirelessly to help businesses grow with deliberate, strategic goals in mind. In this post, Johan talks about the importance of a commercial pricing strategy and how you can build your own framework for commercial success. Over the last 5 years as a commercial advisor, I've met dozens of companies with historically-founded pricing approaches. Born out of their traditional way of setting prices, their pricing is based on costs or follows a competitor who seems to have a pricing strategy. Read more: The Ultimate Guide to Dynamic Pricing Additionally, instead of documenting their strategic choices, many companies’ pricing strategies are stored in employee heads. This means it’s difficult to share the strategy with (new) colleagues. But imagine if you had your pricing strategy on a single sheet of paper, ready to implement, share, and iterate. It might seem like a far-off dream, or even unimportant, but the reality is that a practical pricing strategy helps you take control of your business. The remainder of this article describes the benefits and steps involved in setting up such a practical pricing strategy, specifically for retail companies. What is a pricing strategy, and why is it important? Without a steering wheel, controlling the direction of a car is impossible. You can end up anywhere, and the impact could be disastrous. The only thing you know is the outcome is highly unpredictable, and that there is an increased risk of accidents along the way. I like to think of the pricing strategy as the steering wheel to your business: it helps you direct where you want your business to go and gives you full control. At its core, a pricing strategy takes your company’s commercial strategy and turns it into a more actionable pricing objective. With a pricing strategy, just as with a steering wheel, the chances that you’ll veer off-course are significantly reduced. It delivers commercial peace of mind, as different scenarios are thought through and incorporated in the direction up front. In addition, the pricing strategy includes the different levers you’ll use to keep your business on track. When something changes in your market, you can adjust the business rules around each lever to maintain stability. Let me illustrate how a pricing strategy will work out in practice with an example. Imagine your main competitor drops prices of products in a certain customer segment. What do you do? Here are two possible scenarios: 1. No pricing strategy After some stressful ad-hoc meetings and internal escalations, your company decides to respond with a price drop. In fact, to prevent volume losses, you give an even steeper discount than your competitor for all of your affected products. How do you think your competitor reacts, and what does it do with your margins? This could easily be the start of a price war, which will always have more losers than winners. 2. Practical pricing strategy in place Instead of following the competitor all-in, your company looks to your pre-established pricing strategy before making any decisions on how to proceed. This strategy, which considered your positioning in relation to this competitor, has a clear framework for what to do. You just need to apply the business rules of your framework. Here you determined a percentage price bandwidth towards this competitor. In addition, you determined up-front a minimum margin per customer segment/product category. It appears that the majority of the affected products remain within the competitor bandwidth, so no action is required. The products that do go below the competitor price bandwidth are still above your minimum margin threshold, and will be adjusted according to the business rules in place. This leads to price changes for a reduced set of products and keeps margins constant for the remaining products. This way of working enables you to stay in the driver’s seat of your pricing. You stay ahead of competition by iterating the initial pricing strategy along the route and making your business rules more specific. At the same time, you probably realize an uplift in your margins compared to the initial situation. How to set up a pricing strategy There are two ways to determine your pricing strategy: from the top-down or the ground-up. Top-down, you can extract a pricing strategy from the commercial strategy. Bottom-up, you can construct it from your transaction and customer data. A pricing strategy should be practical and contain at least the following two elements: A framework The framework element means that your pricing strategy has a structure that includes all the relevant pricing levers required for your business. An example of such a lever is seasonality. For hotels this implies that the price for a hotel room could go up a bit during holiday seasons. Having such a framework gives you piece of mind, because it helps you visualize the different instances where your prices might need to change. Often this structure is missing, and with my company ‘Commercieel Verbeteren’, I often help customers create this framework for a comprehensive overview of their pricing. Business rules When the framework is ready, my customers often feel like the pricing beast finally got tamed. But to build a true pricing strategy you need to go one step further. After the framework is set, you need to discuss how these different levers should work for your company through business rules. This means putting a minimum, maximum, and/or bandwidths to the different levers. In this way you, or your pricing software, can act upon them. Together, the framework and the business rules provide you with a practical pricing strategy ready for action. The 3-step approach to a pricing strategy Ok, I get it. I also need a pricing strategy! But how to proceed? Well, there are three steps involved in setting up your pricing strategy. 1. Assess your place in the market Much like the previous blog post in this series on defining your commercial objective, developing your pricing strategy begins with self-reflection. I call this step the As-Is Situation. Before you start building a new pricing strategy, you need to understand what you are already doing for pricing. Gather the relevant stakeholders and try to answer the following questions during your review phase: What does our current price model look like, and what are the pros and cons of this model? Where do you stand in the market? Is your company the leader or the challenger? What is the current commercial focus of your company? Are you more concerned with volume of sales or the overall profit? There are certainly more questions you should ask yourselves, but these will help start the conversation. 2. Build your pricing strategy framework Subsequently, involve relevant internal stakeholders in solution sessions. The first goal of such a session is to share the common understanding of the As-Is situation. In my experience, this is often regarded as “known” information — meaning it’s a step that many clients breeze over or ignore. But in reality, it’s not safe to assume that everyone has the same understanding of your existing pricing tactics. That’s why I encourage clients to use this time to go over the findings of the As-Is analysis and refresh everyone on the existing pricing strategy. The second goal of this solution session is to create the first draft of the previously mentioned framework. This requires good knowledge of your business from sales and segment managers, combined with pricing knowledge on options and viable alternatives. Use all the talent in your organization to develop a strategy that matches your commercial objective and consumer expectations. 3. Set business rules When you know the levers of your framework, you can work on the business rules and create what I call the To-Be situation: how should your pricing work in the future? This involves setting the levers of your framework and finding the right calibration based on all the information you have available. Start iterating and testing After you’ve set your business rules and are internally aligned, the fun really starts. You can take those rules and put them into a tool like Omnia to start testing what works and what doesn’t. What does it bring me? Recent input from a case study If you have a large product assortment, it’s most practical to use pricing software like Omnia to implement your pricing strategy. Recently, I worked with Profile to set up their pricing strategy, which they implemented in Omnia. The pricing software helped them (dynamically) set prices, and save time by doing so. At the same time, it contributes to future iterations of the pricing strategy, based on realized data points and competitive behavior. In this case, it led to double digit margin improvements within a month of going live, with more potential to come based on the framework developed. You can grab your copy of the case study here. Final thoughts As the second step in the Five Steps to Successfully Implement Dynamic Pricing, your pricing strategy is extremely important to your company’s growth. A pricing strategy sets you up for success and gives you more control over unexpected changes in the market. Curious what a pricing strategy can mean for your business? Contact me directly on johan.maessen@commercieelverbeteren.nl, 0641369590 or discuss the possibilities with your Omnia consultant.

“Testing” is a buzzword in the world of online work. If you have a company that interacts with customers in the digital sphere, it’s likely that you want to consider testing in some form. And that’s a good thing....

“Testing” is a buzzword in the world of online work. If you have a company that interacts with customers in the digital sphere, it’s likely that you want to consider testing in some form. And that’s a good thing. Testing gives you insights into consumer behavior and helps you make smarter decisions on your webshop. Web developers and marketers often use A/B testing to experiment how different web layouts influence consumer behavior. When consumers land on a site, they are randomly redirected to an A or B page, each of which has the same goal in mind but which varies in messaging or design. Developers and marketers then evaluate differences in conversion or bounce rate between the two pages to determine which performed best. Just like web developers, retailers can use testing to learn how prices influence the overall conversion rate for products. You can then use these insights to optimize your display price for margins and conversions — a crucial part of your company’s marketing plan. But testing prices online is not as easy as testing a website design. To start, several factors influence the validity of your data, and testing at the product level is time-consuming and inefficient. As a result, A/B testing prices on the product level is a risky venture, and retailers should approach it with caution. So what’s a better way to test your pricing method? Especially since it's a crucial stage in the Five Steps to Successfully Implement Dynamic Pricing? Read on to learn everything you need to know about price testing and the best way to manage your tests. Testing pricing online is difficult Testing prices on a product level is difficult for several reasons, regardless of which method you use. Some significant barriers to online testing include: 1. Cross-elasticity Product prices don’t live in isolation; instead, they are part of a broader system of price elasticity. Raising prices of Product A can increase the demand for the substitute Product B. It could also decrease the demand of the complementary Product C. There’s no way to be certain that cross-elasticity didn’t impact your test. But if you don’t consider this effect, your results will skew to one side. 2. The marketing effect Pricing and marketing are interconnected in modern e-commerce, but many companies don’t treat them as two halves of a whole. Marketing teams and pricing teams have different KPIs and success indicators, so they ultimately have different goals when it comes to displaying the product online. If you want to test prices, you also need to consider the impact marketing will have on the product. For example, say your pricing team wants to test a price cut on Product A but doesn’t tell the marketing team. Without that knowledge, the marketing team might aggressively push that product on a platform like Google Shopping and generate a high volume of sales. However, in this case, it’s impossible to tell if that increase in sales resulted from the marketing campaign or the lowered price. 3. Statistical validity Testing hinges on one key component: you need a high volume of sales to gather enough information about the test. This is especially true for A/B tests, where the sample size for Price A and Price B need to be significant. There are also several other validity threats to account for in your testing, such as selection bias, the effect of seasonality, and more. Because of these factors, many small- and mid-sized retailers won’t generate enough traffic to make sure their data is valid. 4. Competitor pricing Much like cross-elasticity, your product’s price doesn’t exist in a vacuum on the internet. The uncontrollable factor of your competition’s price for the same (or a similar) product will affect your ability to test a price. If you are priced higher than your competition for a test, consumers will naturally choose the lower price. As a result, you miss out on both valuable sales and important testing data. Additionally, your price and its relation to your competition impacts your overall price perception. This is a massive driver of consumer action and one you should consider carefully. Why you shouldn’t use A/B tests to evaluate your pricing method Just because it is difficult to test your pricing doesn’t mean that you shouldn’t do the tests. Since price is one of the best ways to improve your overall earnings, it’s worth taking the time to experiment and determine the right spot for your products. However, A/B tests of prices offer a unique set of challenges, each of which makes the venture risky. 1. Consumer resentment Consumers see the act of charging different prices to different people as discriminatory, regardless of how the prices were assigned. This has been the case for years: in 2000 Amazon created a PR-nightmare when they tested optimal prices on different customers. Consumers were outraged, and the company ultimately refunded money to 6,900 customers. Today, consumers understand that prices will change throughout the day. But with social media just a few taps away, consumers will find out quickly whether or not their price for a product differs from someone else’s. Any discrepancy they find will embroil their resentment toward a company. This sentiment is the same reason personalized pricing remains unpopular among consumers. Many feel the practice is predatory and discriminatory. 2. Data privacy issues In line with consumer resentment, the general public associates price discrimination with the unfavorable usage of customer data. As an increasingly important topic on the global stage, and it‘s at the forefront of many consumers' minds. Data integrity is crucial to controlling customer resentment. And while you might be able to truthfully say that A/B tests and prices were assigned randomly, customers will grow to mistrust your organization. 3. Decrease in customer loyalty When consumers resent your company for price differences, and when they feel their personal data was somehow used to determine their display price, their loyalty to your organization will waver. And just like consumers communicate about price online, they also communicate about their satisfaction with a company through social media. In the age where customer experience is essential, A/B testing could tip the balance to create unhappy customers. Disgruntled customers are not only detrimental to your long-term business goals, but they can also harm your reputation. 4. Inefficiency Finally, A/B testing is time-consuming and inefficient. For an A/B test to be accurate, you need to monitor the tests on a product level. If you’re doing the tests manually, this will eat up significant amounts of time, energy, and money to the testing process. Additionally, if you run an A/B test on a product, but carry other similar products, your test results will skew. For example, let’s say you want to test a pricing method on televisions. You could carry out an A/B test on Model X television to see which pricing method works best. But if your store sells more than one model of television, consumers could just buy a different TV. They could even buy a tablet to use instead of a TV — the functionality is essentially the same. The better way to test your prices online Considering testing is already tricky, and that A/B testing has significant downsides, what’s a better way to evaluate your pricing method? The answer is to look broader than individual products and expand to categories. Instead of testing a price change across a single product, it’s better to test your price methods on different products categories. As long as these categories are similar in elasticity and customer perception, you can evaluate which pricing method works best for your store. Let’s take an electric kettle and a toaster as an example: both serve the consumer in a single functional way (a kettle serves boiling water, and a toaster serves toast - no more, no less). They are also both kitchen appliances, so they both serve the same customer segment. Even though they are entirely different products, consumers view them in the same regard, so they have similar elasticities and price points. This strategy helps reduce the general risks of online testing and eliminates the risks of A/B testing: Individual customers won’t receive different prices for the same product You can track the effects of marketing more easily You can better control for cross-elasticity Getting started with this testing method is pretty easy with a user-friendly tool: 1. Select the products to test Select two similar product groups, such as electric kettles and toasters. What’s important is that the products have similar functionalities, price perceptions, and elasticities. You can use historical pricing and conversion data to guess which products have similar elasticities, but an easier way is to use a tool to calculate the elasticity for you. 2. Implement the pricing strategy across these products There are several types of pricing strategies you can test. Once you choose the ones you’d like to test for effectiveness, you can apply the new prices to those products and market them as usual. It’s important to remember though that you can’t control your competition’s prices. As a result, when you change your price online, you’ll also change your relationship to your competitors. One way to control this aspect is to use automation that locks in your price position on the market. 3. Test, monitor and analyze After you’ve implemented the new pricing strategies, you can run your products normally and compare conversion data. It will take some time to see results and the data depends on the size of your assortment, but you should be able to evaluate the test after 2-3 months. A world without price testing Testing your pricing strategy across similar products gives you insights on which pricing method you should use. However, it’s also a time-consuming process and requires a significant investment to track manually. Software like Omnia can provide a solution that eliminates your need to test pricing strategy at the product level. Our Dynamic Pricing algorithm optimizes prices for every product and makes testing less relevant. Read more: The Ultimate Guide to Dynamic Pricing The algorithm looks at each product’s elasticity, historical conversion data, and competitor prices then combines that data with internal factors such as stock levels and your commercial strategy to determine the optimal price. It then automatically adjusts the product price online to reduce the manual labor of making price changes. Additionally, fully utilizing the Omnia algorithm enables your prices to fluctuate predictively based on market insights. Final thoughts When it comes to testing a pricing strategy, A/B tests won’t make the cut. To make sure your data is valid and reduce the risk to your company, you need a more complicated test. It's possible to create one of these analyses manually, but it costs a significant amount of time, energy, and money to execute correctly. Tools like Omnia make testing easier. By taking over the manual labor and helping you test more effectively, Omnia frees up time for you to focus on strategy instead of monitoring. Interested in learning more? Click the button below to sign up for a free demo of the software today.

Black Friday is growing in importance around the world. In the Netherlands alone, interest in the retail holiday grew 2,000% from 2012-2017. And with over 70% of shoppers in the U.S., U.K., Germany, and Canada aware of...

Black Friday is growing in importance around the world. In the Netherlands alone, interest in the retail holiday grew 2,000% from 2012-2017. And with over 70% of shoppers in the U.S., U.K., Germany, and Canada aware of Black Friday and planning to take part, retailers and brands are under pressure to slash their prices to stay competitive, both online and offline. But with thousands of products and hundreds of competitors, how can shops know what the best discount is for each product? Better yet, how can they stay competitive on Black Friday itself when prices shift throughout the day? If you’re asking these questions, you’re not alone. Black Friday is stressful, but pricing insights and automation might be the solution you’re looking for to help you tackle the day with confidence. Curious to know more? Here are four ways Omnia’s products can help you get the most out of Black Friday. 1. Focus Black Friday on strategy, not chasing prices. On Black Friday itself, many shops waste time manually tracking and altering their prices. Many on your team will devote their entire day to following the market, including manually comparing prices for multiple products several times. Automating the process with a pricing insights software cuts the work in half. Instead of asking your team to crawl the internet looking for prices, the software delivers an up-to-date report of your competition’s prices multiple times throughout the day. Your team then just needs to update the prices according your your strategy. Automation can even take this process a step further with dynamic pricing, which can automatically adjust the prices for you based on predetermined business rules. Your team just needs to monitor the changes — not enter them manually. 2. Analyze historical data to build a pricing strategy. For most shops, a backlog of pricing data is not necessary for much of the year. But this information is useful for establishing a pricing strategy around the holidays, and especially for Black Friday. Historical pricing insights allow you to monitor products over the months leading up to Black Friday. This data reveals an abundance of information about the product market, such as the price ranges offered by yourself and your competition and the lowest price over the last few months. Your pricing team can then use this data to determine the best promotional price for key products. Instead of arbitrarily discounting every product by 20% just to give a discount, your pricing team can determine which products your company has an advantage over and what they should price in relation to the competition. This way you offer the best price on the market for a consumer on Black Friday, not the same price another store charges on any other day. This practice not only reduces the risk of a competitor undercutting you on important products on Black Friday; it also helps maximize your profits and margins overall. 3. Track and optimize online marketing. Retail automation doesn’t have to stop at prices. Instead, you can use pricing data to make informed online marketing campaigns. Notably you can use pricing data ensure your online advertising budget isn't wasted on out-priced items. By combining competitor pricing insights with your own internal product information (such as purchasing price), your marketing team knows which products are competitive and in-stock, and can ensure that they advertise competitively as well. This connection between pricing and marketing is important, because one small miscommunication between the two channels — especially on a high-profile day like Black Friday or Cyber Monday — can lead to a product appearing significantly overpriced compared to the competition. This can dramatically affect the price perception of your company, though it can be used strategically to sway public opinion. Additionally, automation can help your team track keywords in the weeks leading up to Black Friday itself. This then gives your organization a better understanding of where to advertise online and how you should allocate your resources. In other words? Automation helps your team focus on marketing the products that will have the biggest advantage for your business. 4. Reduce manual labor. Ultimately, one of the most significant benefits of retail automation software is that it reduces the overall manual labor for your team, both on Black Friday itself and in the weeks leading up to the event. By taking over much of the “grunt work", automation gives your team more freedom to create high-impact Black Friday promotions. Final thoughts Automation tools like the ones offered by Omnia help your teams make faster, smarter pricing decisions. And while the tools give your organization superpowers every day of the year, those powers are especially pronounced on Black Friday. Interested in testing out retail automation this Black Friday? Don’t wait. Get in touch today to set up a demo of Pricewatch and see for yourself how pricing insights help you get the most out of the day. Click below to learn more.

The rise of e-commerce has led to a greater assortment of shops. In addition, the internet has greatly increased price transparency in the market, which in turn has increased the frequency of price changes. The...

The rise of e-commerce has led to a greater assortment of shops. In addition, the internet has greatly increased price transparency in the market, which in turn has increased the frequency of price changes. The combination of these two factors made dynamic pricing a necessity in today’s retail market. And as part of the Five Steps to Successfully Implement Dynamic Pricing, shops need to choose a pricing method that makes sense for their organization. Dynamic pricing is often equated with a purely competitor-based pricing method. For example, “Always adjust the price to the lowest of the three competitors X, Y and Z”. Competitor-based pricing, however, isn’t the only dynamic pricing method, nor is it the most recommended pricing method. Three dynamic pricing methods are outlined in this blog post. Pricing method 1: Cost-plus The most straight-forward pricing method is cost-plus pricing. The starting point is the cost per product, where the desired margin (percentage or € amount) is added to calculate a selling price. If the cost per product changes daily or even hourly (due to changing suppliers or dropped shipping for example), it is necessary to implement this method dynamically. Main advantage: Easy to understand & implement Main disadvantage: Takes only internal factors into account How can I apply the cost-plus pricing method in Omnia? This method is easily implemented in Omnia. Create a new variable with the formula editor. Start with the purchase price and add all other product costs from your feed plus a desired margin, possibly at the product-level. Include this variable in your strategy settings as a lower & upper limit and you are set. Read more: The Ultimate Guide to Dynamic Pricing Pricing method 2: Competitor-based With competitor-based pricing, products are priced relative to (direct) competition. For instance, a company might want to undercut a certain competitor. Or, a company might want to maintain a certain price position in the market. It is a common strategy for shops to match prices with their most important competitors for certain products. Stores specialized in electronic products have the highest frequency of price changes and other product categories are likely to follow with an increasing frequency. Therefore, it is essential to implement this method dynamically to not lose any market share. Main advantage: Takes external factors (competitors) into account Main disadvantage: Assumes your competitors have the right price How can I apply competitor-based pricing method in Omnia? Two steps are involved to implement this method in Omnia: 1. Create an action, which is the concrete formalization of your strategy. Some examples: Never price higher than competitor X Never price lower than position 2 in the market Set price equal to most occurring price Etc. 2. Apply this action in the Strategy settings within Omnia to a part of your assortment based on a variable, such as: brand, category, color or even stock. An example: raise price above the average of the market when stock is below 10. Pricing method 3: Value-based By far, the most recommended pricing method by experts is value-based. Value-based pricing is a dynamic pricing method based on the economic principles of demand and shows the best results in additional sales and total margin. As the true value of products is difficult to uncover, consumers’ willingness-to-pay functions as a proxy for the perceived value. Omnia calculates the price elasticity of products to uncover consumers’ willingness-to-pay for the combination of product and seller. A product with high price elasticity is very sensitive to price changes as consumers value the product less than a product with low elasticity (keeping all other things equal). Over time, Omnia learns how much consumers are willing to pay for the product at each price point relative to the competition. You can use this data to further optimize your pricing strategy and create rules for maximum profit with the given price elasticity. Main advantage: Combines external and internal data Main disadvantage: Most complicated pricing method How can I apply this method in Omnia? After a few months of gathering sales data and comparing prices against those of the competitors, Omnia has sufficient data to determine the price elasticity of products and categories. You can then use those insights to build pricing rules that capitalize on the price elasticities of different products or categories. Ending remarks While value-based pricing in theory is the best pricing method, Omnia recognizes the importance of having complete flexibility in automating pricing strategies. Omnia gives the power to (online) retailers to use all three popular pricing methods at the product level and even combine them according to your strategy. For example, the strategy in Omnia for a specific product could be: Begin with value-based pricing through price elasticity Never price higher than competitor X Never price lower than 10% margin To conclude, there are five main benefits when you use Omnia’s integrated pricing methods: Omnia brings internal product & sales data together with external market & consumer data Omnia’s proprietary algorithm automatically determines the price elasticity of products and categories Easily combine all three pricing methods at the product level Automation of the pricing process, multiple times per day No "black box": Omnia is completely transparent about the decisions of the price setting process. For more information about our dynamic pricing & marketing software or guidance on how to implement these pricing methods, please contact us via info@omniaretail.com or call +31 (0) 35 699 02 22. Curious to learn about other pricing strategies or interested in our Amazon guide series? Check out some of our other articles below: What is Value Based Pricing?: A full overview of how price and consumer perception work together. What is Charm Pricing?: A short introduction to a fun pricing method. What is Penetration Pricing?: A guide on how to get noticed when first entering a new market. What is Odd Even Pricing?: An explanation of the psychology behind different numbers in a price. What is Bundle Pricing?: Learn more about the benefits of a bundle pricing strategy. What is Cost Plus Pricing?: In this article, we’ll cover cost-plus pricing and show you when it makes sense to use this strategy. What is Price Skimming?: Learn how price skimming can help you facilitate a higher return on early investments. What is Map Pricing?: Find out why MAP pricing is so important to many retailers. Here’s What You Need to Know About Psychological Pricing (Plus 3 Strategies to Help You Succeed): Modern day pricing is so much more than a numbers game. When thought about correctly, it’s a powerful way to build your brand and drive more profits. How to Build a Pricing Strategy: A complete guide on how to build a pricing strategy from Omnia partner Johan Maessen, owner of Commercieel Verbeteren. The Strategies Behind Amazon's Success: Learn how Amazon became 'the place' to buy products online. The Complete Guide To Selling on Amazon: In this guide we answer some of the top questions we hear about Amazon and give helpful hints on how to succeed on the platform. How Does Amazon's Search Algorithm Work: Find out how Amazon connects their shoppers with relevant products as quickly as possible. Price, The Most Important P in the Marketing Mix: In this article we'll look at the relevance of the 7 P’s in today’s online marketing context.