successful price optimization plan: building the 4 pillars

This is the first post in our 3 part series on price optimization strategies for marketplaces, check back for the next one, which will be linked here!

In 2019, pricing continues to be a ever-changing challenge for online marketplaces and retailers. With new platforms appearing on a regular basis, serving every territory and vertical, competition isn’t getting any less stiff. Price is still one of the main areas of differentiation between marketplaces. 

The world’s top marketplaces and online retailers are using new solutions to continually assess demand, buyer habits, and readjusting their prices. Automated tools make it faster and easier to track price fluctuations without taking up any of your time. Platforms that constantly track and adapt their pricing enjoy +12.7% average revenue growth when compared with platforms that don’t make a habit of refining their prices. 

impact of improving pricing growth lever over other levers

You need to keep your marketplace viable in an arena that is constantly shifting and developing. You’re managing numerous sellers, each of them with their own target prices, profit goals. You want to help your sellers increase their revenue. Helping sellers grow is vital to retaining them on your marketplace!

Customer behavior analytics, and business intelligence are enabling better price optimization decisions -bringing it to a new level of depth and complexity.

We’re here to show you how to join the big leagues by mastering these solutions.

The 4 pillars of a price optimization plan

1) Setting A Competitive Price Index And Sticking To It

Setting a realistic target price index is the first, big step towards understanding where to begin with your price optimization plan. To get a clear understanding of how competitive your pricing is, you’ll need to begin by calculating the price index of your chosen products, for example, women’s shoes.  To calculate the price index for a single product, it’s quite simple:

pricing strategy price index formula

However, to get more useful results, you also need to decide which categories to use for calculating your target price index, like brands, top sellers, or top products.  This involves find the price index for hundreds or even thousands of products, and then calculate their average price index!

Ideally, you’d always like your product prices to be lower than your competitor’s prices.

90%

of consumers say they will invest time to hunt for the best deals

86%

of consumers say that it’s important to compare prices between sellers

60%

of consumers say price is their first consideration in a buying decision

While those numbers are convincing, they might not always be realistic. You should also bear in mind that the optimal price index is the one that generates the highest GMV, and that’s not necessarily the lowest price. Hence the importance of calculating a realistic target price index, that takes into account seller profit margins, logistics, demand, and other factors. 

So what is realistic? Well, that’s really up to you to decide when you build your marketplace. While most retailers and marketplaces try to be more affordable compared to their competitors (i.e Walmart’s “everyday low pricing”), it can vary. You decide where what your value proposition is.

2) Work Price Elasticity In Your Favor

Understanding price elasticity is key to your overall pricing optimization plan. In brief, price elasticity refers to the extent to which sales are affected by changes in pricing.

pricing strategy price elasticity formula

If your sellers have an inelastic product, they can charge higher prices without it turning customers away from buying at your marketplace. When they can charge higher prices without losing out on sales, it boosts both their revenue and yours. 

On the other hand, if their products are highly elastic, it is crucial to pay careful attention to your target price index. A small difference in price between your platform and a competitor platform can have a big impact on sales volume. 

The tricky part is that price elasticity isn’t a fixed quality; it can change based on seasonality, availability, celebrity endorsements, and even the weather, so it needs your continual attention.

 In today’s era of lightning-fast trends and fads that can come and go in the blink of an eye, price elasticity can change from day to day, and sometimes even hour to hour. All it takes is an influencer to endorse a product on Instagram, putting the spotlight on it and it suddenly becomes less elastic than it was the day before. 

One example of this phenomenon this year was for Thayer’s Witch Hazel Toner, an $8 product that shot to the top of Amazon’s bestsellers after being name dropped by popular celebrity makeup artist, Jo Baker:

thayers amazon best seller pricing strategy
Thayer’s currently occupies 4 of the top 8 spots of Amazon’s best-selling toners list

Lightning quick trends like these make it vital that you continually track and test price elasticity to be sure that your pricing decisions are based on an accurate understanding of consumer price sensitivity.

3) Automate your pricing optimization plan

Price monitoring is a non-negotiable element to setting an effective pricing plan. Without high quality, reliable data about your competitors’ prices, stock levels, and promotions, you’ll be playing guessing games with your pricing. 

Prices and product trends are highly volatile. It’s estimated that retail giants change their prices as often as a few times every hour!

dynamic pricing in 2019 statistics

You usually need to gather pricing data every day, and possibly a few times every hour, in order to be sure that you have fresh and accurate information. Conducting manual price checks is extremely time-consuming, especially if you have a large number of products and a lot of competitors.

A far more efficient way of getting around this is to take advantage of pricing optimization solutions is to automate the process of harvesting pricing information. Software solutions constantly updates you with insights into your prices relative to your competitors, repricing your products automatically. Let technology do the work!

4) Promote your hottest products and upsell

Once you’ve understood the impact of price index, price elasticity, and price optimization, you’re ready for the final step – promotion. Promotions like product bundling, seasonal discounts, upselling, cross-selling, and other advanced tactics can help you increase your AOV and eventually, revenue.

Running promotions isn’t as simple as it sounds. You need the tools to help your sellers identify which products will benefit the most from promotional tactics, and which tactics to apply to which products. 

For example, Amazon has a host of pricing optimizations and promotions which enable it to charge more for less-popular items, while establishing itself as a lowest-cost marketplace in the public perception. For example, Amazon sells TVs for a price lower than its regular price, but charged significantly more than the average for an HDMI cable that it upsold alongside the TV.

Are you optimizing your prices?

A realistic target price index, updated pricing elasticity insights, automated price monitoring solutions , and a comprehensive promotional strategy are the vital pillars that uphold your pricing plans. The world of ecommerce is competitive and cut-throat, and there’s no room for guesswork or estimates. 

The next posts in this series will focus on how to simplify and automate your pricing optimization plans, driving up your marketplace’s AOV and revenues!