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4 Steps to Implement Dynamic Pricing

Since its inception 25 years ago, Amazon has transformed customer expectations, from delivery speed to returns policy. But perhaps there is no larger change in consumer expectation than what Amazon has done to pricing.

Through regular re-pricing of millions of products every day, Amazon has transformed customer expectations on both how often prices are permitted to change across retail and by how much.

The e-commerce giant’s ability to rapidly and frequently adjust prices on millions of items has allowed it to build a global low-price reputation. This is all done by undercutting competitors on key value products, while protecting their margins by charging more for less price-sensitive items.

This approach, spearheaded by the e-commerce giant, has meant that Dynamic Pricing is now a fundamental capability for any company competing in e-commerce and even brick-and-mortar retail to grow revenue and maintain market share. If you’d like to learn more about how other companies are using Dynamic Pricing, check out this link.

So if a business is looking to roll-out dynamic pricing - these are the 4 key steps to implement Dynamic Pricing:

  1. Defining your Pricing Strategy (if it hasn’t been done already)

  2. Deciding upon the cadence and frequency of price changes.

  3. Developing Trust in the Recommendations.

  4. Setup a Pilot on specific SKUs.

1. Defining your Pricing Strategy:

There are a number of pricing strategies available to the retailer including competitor driven, key value item (KVI) focused, and premium pricing. It’s important for the adoption of dynamic pricing that the strategy be defined for the business so that it can be applied in the dynamic pricing platform.

If it is an e-commerce or Omni-channel business, it is highly likely that competitors pricing will be both available and highly relevant to the implementation of the dynamic pricing platform.

If you’d like to read more about different pricing strategies, check out this link.

2. Deciding upon the frequency of price changes.

The cadence of the price changes is also an important consideration in the implementation. the channels the business operates in, the frequency of competitor price changes and finally, the cost of actually implementing the price changes all need to be considered. For example if the business is an e-commerce operation, then the dynamic pricing platform integrates with the backends such as Shopify and Magento, meaning as soon as a price recommendation is approved, then the website is updated.

Whereas if the business is OmniChannel or Brick and Mortar only, then the cost of making a price change is much higher with wages allocated to the teams in-store changing the price tags.

Some businesses such as Best Buy have recently made the move to digital price tags in-store to reduce the cost in wages of frequent price changes.

3. Ensure your team develops trust in the recommendations.

The revenue growth of 2 to 5 percent and increases of 5 to 10 percent in margins can be often largely attributed to ‘counter-intuitive’ price changes that the A.I has identified as opportunities. In our experience this comes in the form of the A.I recognising that a product is not particularly price sensitive, either because it’s not sufficiently expensive to justify a price check by most customers or it’s mainly sold in the brick and mortar side of the business, again meaning it is not regularly price checked. In recognising this the A.I dynamic pricing algorithms begin to recommend prices higher than competitors. For many category managers and pricing managers this is quite removed from their usual strategy and can be hard to trust when they are new to dynamic pricing.

This is compounded by the black-box problem, where the algorithms have not been designed by the end users and the algorithms are not able to provide a full justification of why they have chosen a price. Consequently pricing staff, if not setup correctly, can end up rejecting them entirely because they seem counterintuitive and they don’t trust the recommendations.

Helping the team overcome this trust barrier is critical in the deployment of dynamic pricing. Especially given the beneficial financial impact dynamic pricing typically delivers for a business. In our experience, having a dynamic pricing platform that should be designed for the end-user, the category managers and the pricing managers. The roll out of the platform needs to be conducted with appropriate education and support of these key users. Only once this is done can the business expect to see the significant impact on both revenue and margin that dynamic pricing can have.

4. Setup a Pilot on specific SKUs.

Finally, if the business is of sufficient size, it is recommended that you setup a pilot across a specific category or control group of SKUs. This will enable you to evaluate the performance of the strategy and the dynamic pricing algorithms. Key metrics that are typically tracked are; forecast accuracy, revenue improvements, margin forecast accuracy.

The post above gives a manager's level view of the steps required to implement Dynamic Pricing into a retail business. If you’d like to learn more about Dynamic Pricing and available solutions, check out the Remi AI Pricing Platform.


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