The huge improvement in Science and Technology so far, has affected -as expected Retail Industry too. With evolving marketing trends in 2018, Pricing Strategies also seem to keep changing.
You should pay attention to your pricing strategies before it’s too late.
Relationship Status of Price and Profit: It’s Complicated
Let’s start our topic by breaking some rules. In too many resources, it’s said that increasing price is the key factor for improving the profitability. From
mathematical point of view, this equation is correct.
But on the other hand, this comparison should be a function of time. Unless there is a time limit, profitability can be directly increased by price. But for a longer period, it is not only dependent on higher pricing.
Does Profitability really come from Profit?
To have a sustainable survivability, companies should take continuous income models into account. A well known businessman, describes his business management model with juggling 3 balls. According to him, there are 2 rubber balls: equity and profitability. These can be dropped while they can bounce back again. But the third ball is made of glass and breakable, it’s called cash flow.
In the world of business, profitability is of course critical, but not everything. Big profits can help a company achieve growth in short term, but what is more important as a financial figure is the “cash flow”.
In order to be able to remain strong in a business, a truly successful cash flow is needed. And for retail market, pricing is the key element to build it.
What is Pricing and What is not?
Pricing is more than increasing or decreasing the value of a product, it’s a way of marketing. A smart pricing will not only improve cash flow, but also increase profitability, which will be a double-win for the company itself.
The first main rule of pricing of a product is that pricing should be neither too low to create question marks in customers’ minds nor too high to be less appealing in comparison to its rivals.
The Price-setter should be aware of too many factors such as; costs, expenses, human psychology, market situations, even ethics and the law. And tradeoffs should be made between external and internal constraints by the setter.
Before going into pricing strategies deeply, let’s check the current situation of the retail market and the numbers.
Retail Market in Numbers
Let’s start with a general overview. According to the US Retail E-commerce statistics, the e-commerce sales volume in the US has been rapidly increasing and is expected to pass 500 Billion $ threshold in the upcoming year.
Based on US Commerce Dept., even though there is a huge growth in e-commerce, brick-and-mortar industry is still in the pole-position way too far. E-commerce includes only 9% of total retail sales due to resistance of several sectors.
These 13 digit numbers of e-commerce volumes, and the ratio that can be stolen from brick-mortar market shows us that 2018 will be an exciting year to follow!
Spring/Summer‘18 Retail Trends
As we realize that there is a potential in the market share of retail , 2018 trends will be helping us to learn how to get a big slice of it.
Here are the major trends of 2018 on retail:
Shop Easy: The act of buying will be child’s play. Features like auto-renewals, one-tap purchases, and same-day deliveries will turn daily shopping into an easy routine.
Build Your Own Product: Personalization will be the key. Shoppers can customize and edit what they buy.
Robot-it: Robots will produce, robots will deliver, and even robots will answer calls from customers.
Social Media: “Like in Facebook, share in Instagram, complain in Twitter” loop will continue in its way.
Big Data, Bigger Data, The Biggest Data: Big Data, Machine Learning and IoT will be used more to interpret data and use it for customer satisfaction.
AR/VR/QR: Even incapable people will have the chance to fix their own IKEA furniture without any help with the help of visualization.
Impacts of Trends on Retail Pricing Strategies
Based on these trends, pricing strategies are also evolving in a similar way. As traditional pricing strategies are still respected; new, dynamic, data-driven, real time pricing strategies also exist. The new strategies were born by the help of both some new technologies, and human based & neuro-scientific experiments.
Firstly, we’ll recap the traditional methods:
Recap of Traditional Pricing Strategies
Here is the question: If your Grandma wanted to sell her TV, how would she set its price?
Very basically, she would be using the simplest pricing categorization first: follow, penetrate or skim. Grandma would:
- Follow her trustable and respected neighbor who is also selling her TV and copy the price of her, or;
- Penetrate market by giving a much lower price than her neighbor and try to sell first, or;
- Skim off the cream of the cake, by finding a rich friend who can pay relatively higher price for her TV.
Apart from this most basic pricing strategy, other conventional pricing strategies are simple to use and simple to explain.
Manufacturer Suggested Retail Pricing (MSRP): Also known as vendor pricing. It uses list prices of the vendor/manufacturer. It’s a method, not a strategy in fact.
Bundling Products: Selling more, earning more and making the customers feel like they won a trophy.
Sales Promotions: Using some tactics; such as presales before product launch, daily deals, discount codes, Buy One Get Ones (BOGO), Black Fridays etc. in order to create urgencies and sometimes Fear of Missing out (FOMO) in customers’ minds.
Number Engineering: Using selling prices ending with .99’s to influence customers as they are paying less, and avoiding using decimals if the price is high.
Price Match Promise: Offering the customer a challenge to find a better price than company itself. If customer can, retail re-changes the pricing and compensates the difference. This strategy does not work or at least carries high risk for drop-shippers compared to manufacturer.
Brand-New Pricing Strategies for 2018
- Human Based Approach: Neuroscientific Pricing Strategies
As reported by Deloitte, buyers’ price perception and willingness to pay rely on several psychological effects. The instinct of deciding on a price’s value happens when customers face the situation, and thought-provokingly this process is generally unconscious.
Here comes the term Anchor Pricing or Price Anchoring.
Price anchoring uses the prejudiced buyers, and affect their decision making process.
For instance, when a consumer sees a crossed out original price with a cheaper sales price together ($150 – $49.99), he thinks that the product is worth more
than it is. By the help of this thinking method, which is made totally unintentionally and unconsciously, the new shown sales price looks more appealing to him.
The success of this method was proven thanks to scientific research. There have been some visual experiments held with potential buyers of a retail product, and
their brain data was measured by EEG (electroencephalography). As a result, it’s found that brain data changes more when a high anchor price is seen. Due to higher accuracy of prediction capability of brain data on human behaviors, EEG today even has become a measurement tool in the market.
Conclusively, whilst traditional pricing methods only focus on consciousness, neuroscience based methods like anchor pricing helps smart retail companies understand better their buyers’ willingness to pay and change their price perceptions.
- Computer Based Approach: Data-Driven Pricing Strategies
With the increase of data and progress in Big Data and Machine Learning applications, now the world is more dynamic. Changes in people’s behaviors, decision-making algorithms, markets, competitors’ strategies and even in measurable brain data -which was explained above- can easily be discovered, tracked and benchmarked today.
By dint of ease of access to these changes, any kind of traditional pricing strategy can be customized and turned into a new generation method.
For example, by using several online tools to collect and track competitors’ price values, a retailer can make a counter-move to its rivals promptly. Besides, the changes and change frequencies can also be interpreted by AI tools, and the next move of the competitor can be forecasted previously. At the end, this whole method will be named with a totally new and a company-specific name pricing strategy.
Another example is that, as a result of data enrichment, retailers can provide personalized services to their customers. Today some companies like Netflix has already been doing this to its users and showing different homepages to each user. In addition to what Netflix is doing, retailers can also make their pricing and marketing activities specifically one by one to its customers.
To sum up, by having accurate data and owning several tools like Datapare Competition Analytics Platform, retailers in the near future can not only overcome their pricing decision problems, but they can also create their own pricing strategy model.
How to Fine Tune Your Pricing Strategy in 2018
For a retail company, there are several public strategies for pricing, as we mentioned in this post. With the marketing trends of 2018, these traditional strategies have been evolving into new smart strategies, especially into data based and human based, with help of Big Data and Human Behavior Pattern subjects.
It seems that as the new trends come, pricing strategies will be in a continuous transformation.
To optimize a retailer’s pricing strategy, the best is to combine these two approaches.
To conclude, a mixed way of price setting strategy is the correct solution. But, it should be remembered that in order to make this combined solution possible, you need to employ certain tools to track your competitors, discover the trends and bechmark their prices to make data-driven decisions.