Market Driven Dynamic Pricing(MDDP) gains prominence as a must-have eCommerce pricing strategy
In an extremely fast-paced and competitive retail environment, retailers are constantly struggling to adjust prices by determining the willingness of customers to make purchases. Lower prices may boost volumes but impact revenues, while higher prices improve margins but may risk losing customers to the competition. Identifying the right price to strike a balance between the two is both an art and a science.
External variables like consumer demand, competitive price, general market conditions, and economic developments also impact pricing tactics.
Market Driven Dynamic Pricing (MDDP) is a strategy adopted by retailers to stay competitive in an extremely price-sensitive eCommerce environment. This strategy not only allows them to stay buoyant in the face of aggressive pricing from competitors, but it also incorporates various factors such as current market demand, seasonality of products, stock availability, and peak times of service while driving the company’s objectives of growth in revenue, profit, market share, etc. Because it alters prices based on consumers' propensity to make purchases, dynamic pricing is one of the best strategies for growing market share.
Why are market-driven pricing strategies gaining pre-eminence?
A study by Walters and Jamil shows that 39% of all items purchased on a trip to a grocery store are price promoted. This aspect of consumer behavior only intensifies when they are shopping via eCommerce platforms, where it becomes much easier to access information about prices across competitors.
Historically, creating a pricing strategy used to be a laborious task requiring intense manual intervention, but it was imperative to stay competitive and relevant, even for brick & mortar retailers. With the advent of technology and data science, manual tasks are being replaced by algorithmic solutions that give the retailer (and even the category managers of companies with large catalogs and millions of SKUs) the ability to optimize prices by balancing price elasticity with consumer demand.
Ecommerce retailers pioneered the idea of selling the same product or services at different times under different circumstances. Today, it is no longer possible for eCommerce players to always stick with a single price tag.
Some factors contributing to this are:
Consumer Behavior at the time of purchase – Be it online or at a store, 65% of consumers compare prices and features online as well as offline before they make a purchase decision. Where Price comparison bots make the comparison easier for users, this role is increasingly assumed by the search engines with shopping suggestions built into the algorithms. Often eCommerce websites themselves act as a search engine with price and feature comparison with suggestions readily made available to the consumer.
An Abundance of Data and growth in Machine Learning – Every time a consumer goes online and “accepts a cookie” or registers for promotional events/newsletters/discounts, or purchases anything, data is generated and captured. While the quantum of this data may have been difficult to manage earlier, the progress in machine learning and data science have made significant inroads into getting a better understanding of each consumer for eCommerce giants.
A dynamic approach to Consumer Demand – A retail pricing strategy based on “market-driven demand pricing” provides deep insight to the brands to understand trends, competition’s prices, and how they compare with business strategy.
Inflation – A review of the Consumer Price Index numbers for the last year indicates that the CPI has increased by 8.3% over the last 12 months in the US and in the EU, it stands at 9.1% as of August 2022.
Currency fluctuations – If all sales and costs are in one currency, retailers are insulated from this trend. However, in a global economy, this is highly unlikely. Most businesses are selling across multiple currencies and buying from multiple currencies. Currency fluctuations have been rather volatile in the last year. Firming up prices in one currency and using standard conversions to obtain prices in another currency may not work. This could result in the product being too costly or too inexpensive – which means they either do not sell much, or they sell a lot at bad margins.
Myths and facts regarding MDDP
For decades, the average consumer is used to price tags being the final say on the fair price for a product. It is natural to assume that dynamic pricing may raise concerns among consumers. Clients may be reluctant to discuss dynamic pricing strategies presuming that such mechanisms are all about making a quick buck at the customers’ expense. Nothing is farther from the truth.
Exploiting customers – if anything, it gives competitive service to the consumer as it is the retailer who must compare their rates with other companies and adjust their sale price.
Blindly matching competitor prices – the price adjustment is done keeping in mind the context objective that is to be achieved (like end-of-season sale).
Predatory pricing – “Predatory pricing is the lowering of prices by a company specifically to put rival firms out of business”. Market Driven Dynamic Pricing is not predatory pricing as the aim is to best support customers while achieving business goals. There is no “bottomless” pricing in this strategy.
How Dynamic Pricing Strategies Work
There is never a one-size-fits-all approach to driving the pricing strategy. Market Driven Dynamic Pricing is NOT about continuously dropping the prices with respect to the competition.
It calls for a deeper look at all the products/brands and SKUs that the platform carries and create a plan that drives the pricing strategy. One may choose to be highly competitive on items of daily consumption like milk, eggs, bread, etc, and adopt a premium position on special products like wine, cheese, and organic produce that the nearest competitor or offline retail stores may not carry.
Here are some steps to get started on understanding and executing Market Driven Dynamic Pricing:
Define your goals – The strategy adopted should be based on the targeted goal - liquidation of stock, maintaining high margins, increased footfall, etc.
Define the categories – Different categories can have differing strategies Understand the consumer – Price fluctuations based on trends in fashion may be more readily accepted by the consumer than changes in everyday staples
Create a robust competitor price intelligence program – identify key competitors and put together a framework to monitor the prices of competing products
Establish the floor on margins and prices for each product
Create a robust competitor price intelligence program – identify key competitors and put together a framework to monitor the prices of competing products
Define the frequency of price change – Classify products into categories where there should be a daily price change and ones where weekly or monthly price revision may be the norm a. Consider AI software – Today more and more software solutions based on Artificial Intelligence and Machine Learning are available that will help factor in multiple agents such as shopping history, competitor pricing, supplier pricing, stock volumes, etc.
Establish a framework for product pricing – Define a mechanism for price combinations to work for purchase in single packs, six packs, a dozen, or multiple dozens, and how they compare for different brands within the same category.
Revision – The way to successfully adopt MDDP is by continuously evaluating the strategy to see how the consumers behave with respect to the changes in the pricing policy.
In Conclusion
There is a significant amount of data that is being generated daily. How this data is captured, and analytics applied to gain insights will be a determining factor to see which eCommerce Platform or brand wins in the marketplace. Market Driven Dynamic Pricing is an impactful approach to boosting sales and driving the organization's objectives.
