When does price matter? Econ 101 teaches that demand decreases as prices rise, and increases as prices fall. Econ textbooks inevitably present a graph with a graceful curve, illustrating the phenomenon. The problem is that there are no numbers on the axes of the graph, so you never know how much price matters. To make the situation more complicated -- and more realistic -- consumers make purchasing decisions based not simply on your price, but also the prices of alternatives. That may mean it's time for pricing intelligence tool and other strategic procedures to help you make wise, unemotional decisions.
Someone who considers a book a great deal at $19.99 may decide to go buy from a competitor if they can find the book for $15.99. Some people may go elsewhere if they can find the book for $19.98. Some people will never switch, at least in this case, but might switch over small price differences in other categories.
How can retailers make sense of such complicated situations?
1. Use an automated pricing intelligence system to gather data from competitive web sites.
2. Utilize dashboards that can overlay your sales and pricing data with the market data.
3. Have a clear strategy to help focus on the right areas. Otherwise, you can get overwhelmed with data, and, while you know more than you did, you may not be able to take effective action. The pricing intelligence system is a necessary tool, but you still have to use it properly. Focus your efforts where price changes, either by you, or in the market, have the greatest impact on your business. (As you gain experience, you may wish to automate some of the price responses within “reasonable” bounds).
4. Employ a testing strategy so you can measure the price elasticity of demand in different markets with different competitive situations. This feeds back into your overall strategy, allowing you to fine-tune when and how you want to react to competitive pricing moves. Most helpfully, you may find a lot of scenarios where prices changes have no measurable impact.
5. Create a price adjustment playbook that you can follow to deal with competitive moves without being overly swayed by emotion. For example, you might specify that we are always, “within 5% of Competitor X, unless our margin drops below Y”, or “Ignore pricing moves unless Competitor X is more than 10% cheaper for Product 123 AND our sales of Product 123 have fallen by more than 5% week over week.” You can add to the playbook as needed, but by necessity, you will have to focus on the most pressing cases—your top sellers and chief competitors, where you find measurable impact.
Don’t react blindly or impulsively to market pricing changes. Make sure you understand the impact these changes have on your business and focus where it matters, by following the wise paths described above.