For most products sold across multiple retailers, the process for dynamic pricing and market monitoring is relatively painless. All you need to do is provide the GTIN code for these items, then your dynamic pricing system can search the web for that GTIN code.
And while you probably have plenty of these “matchable” products — products from different brands that you can “match” based on GTIN codes — what do you do about the private label products you produce and sell exclusively in your stores? When the system can only find the GTIN for a product in one store, how can you make sure the price of that product still stays as agile as the market?
This is where reference pricing becomes a crucial part of your dynamic pricing strategy. And if you’re a retailer who sells these products, this post is for you. Keep reading to learn more about reference pricing, how to implement it in your dynamic pricing tool, and how to reap the benefits of this powerful tactic.
What is reference pricing?
A reference pricing strategy uses the prices of similar products on the market to help you determine the price for your private-label products. If your company sells private label light bulbs, for example, which can’t be found elsewhere on the market, a reference pricing strategy lets you monitor the market prices of similar light bulbs across other retailers so you can adjust your price to market levels.
Why is reference pricing important?
Any retailer who creates unique products in-house can use a reference pricing strategy. And the benefits are numerous, such as letting retailers:
- Sell more private label products
- Keep private-label products competitive online
- Protect brand image and online price perception
- Control market positioning for private-label products
- Keep price in line with relative value towards comparable products
In short: it’s a sensible strategy that lets retailers (and brands, in some cases) manage the prices of their private-label items online.
How does reference pricing work?
Reference pricing starts with deciding which products on the market are most similar to your private label products. If you make a smart light bulb, you will need to decide which manufacturer produces a lightbulb that is most similar to yours in terms of features and overall value.
This is the hard part because it requires a certain amount of manual labor. But once you determine which products are most similar to your own, the process becomes much easier. All you need to do in your dynamic pricing system is link your product’s GTIN codes to the other product’s and determine how you want your private-label item to relate to this product. Your pricing system will then follow this branded product one-to-one, and whenever the price changes on that branded product it will update your own product price.
Some systems (like Omnia) will take it a step further and even update your product prices automatically. This saves you the stress of manually doing the price updates and makes sure your products are constantly aligned with the branded product online.
How to set up a reference pricing strategy
Creating a reference pricing strategy is relatively easy, but it does require a certain amount of “grunt work” before you can fully benefit from the practice. Though we briefly described how reference pricing works above, in this section we’ll dive deeper into the steps you need to go through for a successful strategy.
Step 1: Determine which branded products are most similar to your private-label products, and collect the GTIN codes of these products
To start, you need to uncover which product you want to use as the reference point for your private-label price. This is the hardest part of the process because it involves manual labor.
Think about what your product does. Consider your product features. If you have a private label smart light bulb, features you might consider are:
- The type of bulb
- Light power
- Energy efficiency
- Average lifespan
- Number of colors
The more specific you can get, the better. The above list is by no means exhaustive for a lightbulb manufacturer, but it does provide a good starting point for determining the important factors that you’ll compare your product on.
Once you’ve decided which features you want to use as a reference, you need to go through competitor products to determine which one is most similar to yours. This will be your reference product. Once you know which item will be your reference point, you can find the GTIN code for that product.
Step 2: Determine the value gap between products
After determining which branded product you’ll use as a reference point, you’ll need to decide how you want your private label product to relate to it in terms of price.
For example, say you want your private label product to be seen as the more cost-effective alternative to a name-brand product. You’d then obviously price yourself slightly lower than the reference product. But the degree to which you price yourself lower depends on your commercial strategy, the nature of the product itself, and the capabilities of your dynamic pricing tool.
Read more → How to Build a Pricing Strategy
To decide this, you’ll want to get all relevant product stakeholders in the room. Here are some questions to help facilitate your discussion.
- What is your commercial strategy?
- What is your desired price perception?
- How does your goal price perception relate to your reference product’s price perception?
Step 3: Create pricing rules in your dynamic pricing system
So you’ve determined your reference product and how you want to appear in the market relative to that product. Now you need to turn those ideas into concrete rules in your dynamic pricing tool.
Every dynamic pricing tool will be slightly different in this approach. If you already have a software provider, you should ask the company how to set this up. If you’re still shopping around for a solution, this is something to consider in your purchasing decision.
Step 4: Implement, test, and improve your strategy
Once your pricing rules are in place, you’re ready to go live with reference pricing! Let your system run as normal, then update your prices accordingly, whether that’s by hand our through automated price updates.
Reference pricing is critical for retailers (and some brands) who produce their own products and want to keep those product prices aligned with the overall market. And while it might seem intimidating at first, after the initial task of deciding on your reference prices and setting pricing strategies, your dynamic pricing solution can easily manage your prices.
Curious about reference pricing, but want to learn more from a human expert? Reach out to Omnia today to chat with one of our consultants. Click here to get in touch today.