How to Increase Revenue with Dynamic & Personalized Offers

5/27/2014
These days, retailers are tracking everything – who is buying, when they are buying, what they are buying and even shoppers' buying habits and online browsing behaviors. Not only does this real-time consumer data help retailers get to know their customers but it also helps them adapt pricing and discounts based on each individual's profile. In short, online retailers are now able to gain a competitive edge by micro-managing their pricing strategies and customizing their offers.

Jerry Jao, CEO of Retention Science, has been guiding retailers such as SwayChic and The Honest Company in their quest to provide customized offers that maximize ROI, and is sharing his hard-learned lessons with Apparel readers.

Q: Can you explain exactly how dynamic pricing and discounting works?

A: Dynamic pricing occurs when customers receive different prices or discounts for the same product. For example, you may be a collector of custom cowboy boots, and thus, will receive 20 percent off your next pair of Old Gringos. Meanwhile, your friend, who is a last-minute gift shopper and lives in an urban area, may receive an offer of free shipping instead of a reduced price. This is all based on information collected that indicates what it will take to convert you and your friend to a sale.

Q: How can apparel retailers gain a competitive edge via dynamic discounting?

A: There are huge margin benefits if you don't have to give away the same discounts to all customers. Once a customer receives 20 percent off their total purchase, this becomes the standard in their mind, making it increasingly difficult to manage customer expectations. By not giving away the biggest discount to all buyers, retailers can not only manage expectations, but also avoid cannibalizing the impact of big promotions, particularly during the holidays.

For example, working with Retention Science, The Honest Company created dynamic lifecycle marketing campaigns tailored to each customer. It identified the most optimal timing, sequence of re-engagement and product promotions for every single customer to maximize conversion.

More than 20 variations of product bundles and promotions were designed for new and existing customers, and using the customer data it had collected, The Honest Company was able to predict the best course of action and optimal discount for each customer. Based on this, the Honest Company increased conversion rates by 170 percent and average order value by 80 percent, compared to campaigns sent without the dynamic offers. It also experienced a 10 percent reduction in the number of offers it sent out.

Q: What are the risks to this approach?

A: Dynamic pricing and offers can certainly incite some grumbles among customers paying more for the same product than their friend. When Amazon first tried this by discounting DVDs for its loyal buyers and charging more to its new buyers, it became a very public issue that received a good deal of backlash, causing Amazon to refund the difference in price. But, if you think of the airline and hotel industries, price fluctuates constantly, and this type of pricing strategy enables them to maximize revenues. The same holds true for the retail industry where major brands like Home Depot and Lowes often vary their pricing based on a shopper's location (identified through their IP address). This is certainly not a new concept, nor one that will go away anytime soon as the technology that makes it possible becomes more accessible.

Q: How can retailers identify the price and discount thresholds necessary for a customer to convert?

A: It all boils down to data. Different types of data such as shopping history, demographic info, browsing behaviors, the customer's propensity to purchase and sensitivity to pricing must be collected and analyzed over time. Some retailers choose to do this themselves while others look to outside vendors. Either way, data collection is becoming a must vs. a want in the retail space.

Q: What is the benefit of dynamic offers to the consumer?

A: Merchants' ability to provide dynamic offers enables them to provide offers that are most attractive to consumers. For example, some consumers value free shipping more than a 10 percent offer, others might value $5 off more. By providing more relevant offers to consumers, hopefully consumers receive "preferred" offers vs. offers that are less interesting to them. Ultimately, this should be a win-win situation for both the business and consumers.

Q: What do you see as the next phase of dynamic pricing?

A: Dynamic pricing is only going to become more prevalent in online retail, so the next big step is to build customer acceptance of the practice. The market will evolve over time until customers become more familiar and comfortable with the concepts of dynamic pricing and discounting, and eventually embrace it as normal. However, I believe we are nearly a year away from this happening because no major brands want to come forward as the educator or evangelist for this little-known but often-practiced tactic.

Q: Any final tips for retailers looking to make the move to dynamic offers and pricing?

A: Retailers need to be thoughtful about approaching dynamic pricing and offers, as these can be perceived as "price discrimination" in the mind of the consumer. However, what consumers don't realize is this is a standard practice already: in credit card offers, in booking hotel rooms and reserving flights, etc. Retailers must understand that there are certain product categories where dynamic pricing and offers make sense, and others where it does not. Executing such an effort requires a deep understanding of consumers and the market; this includes tracking the proper data to understand how your customers behave, then leveraging the data to create customer segmentation so you can be more focused on who to target with dynamic offers and measure whether it provides a significant lift in conversion – since that is still the most important metric.
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