Pricing: Time for Science to Replace Gut Instinct

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Pricing: Time for Science to Replace Gut Instinct

By Joe Skorupa - 04/26/2016
By Joe Skorupa
When deployed correctly, pricing optimization solutions are powerful tools that deliver a clear business edge to retailers. Not only are they capable of setting prices for promotional products that consistently hit sell-through goals, but they can also help the entire product catalog sell at full price. But the catch is these sophisticated solutions can only work as well as the pricing team using it.

In fact, when pricing teams and the strategies they deploy are stuck in the old ways (i.e. relying on the gut instinct of buyers) they can negate the positive effects that are possible when using advanced pricing optimization tools that rely on real-time data streams and algorithms to maximize sales and profits.

Leading retailers who use pricing optimization tools correctly report achieving a 1-2% increase in overall sales and selling more than 90% of products at full price. How many retailers fall into this optimized category? We wanted to know, so we examined this topic recently in a custom research report. Below are a few highlights of what we found. To read the full report with a complete set of charts and analysis click here.

Inside the Black Box

For this report, we define price optimization as an application of analytics that predicts consumer behavior at a micro-market level to maximize outcomes. It does this by using internal and external price data to gain insight into price elasticity. It also supports what-if scenarios to determine pricing outcomes based on a range of parameters that the pricing team sets, which ultimately align business rules with corporate goals. Here are some key takeaways.
  • Retailers set prices every day and are incented to deliver strong business performance results, yet only 26% of retailers say their price optimization software is up to date.
  • This means three quarters of retailers set prices the way they have always done it, by using a mixture of gut instinct and analysis of past performance. This is a proven path to inconsistency and a reliance on frequent markdowns to cleanup mistakes.
  • The good news is that more than a third (37%) of retailers plan to invest in pricing optimization software within 18 months – 11% will invest by the end of the year and 26% within 18 months for a total of 37%.
  • Of those who plan an upgrade, 39% say they are gravitating toward internally built applications, which could be a risky move that simply delivers more of the same instead of a new science-based approach. One third of retailers are gravitating toward packaged software (33%) and a fifth (21%) wants a SaaS or cloud solution.
  • The top two problems retailers want to solve with their upgrade are: prices are changed too late to achieve the desired outcome (41%) and prices are sometimes set too high to hit sell-through goals (41%).
  • The top three considerations retailers weigh when creating rules for pricing optimization are average margin (72%), competitive pricing (67%), and sales channel (51%). You have to wonder how high on this list “gut instinct” would have placed had it been among the options.
  • When retailers spec out their next pricing optimization upgrade they say they are seeking to achieve three top usability goals: the ability to leverage pricing and product data from multiple sources (56%), easy import/export of data (54%), and automated price changes based on rules/approvals (49%).
The only way to achieve measurable improvements through an upgrade to sophisticated pricing optimization software is to also review and revise business processes and the pricing team itself. As always, it comes down to a well balanced approach to managing people, processes and technologies to make a major upgrade work.

Science can replace and improve entrenched gut-instinct methods, but not in a vacuum. The pricing team will need to work with the advanced pricing tool and not against it. When they do both will succeed.

Click here to read the full report with a complete set of charts and analysis.

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