If you’ve ever booked a holiday rental via Airbnb or purchased a product from Amazon, you’ve probably seen smart pricing in action. Powered by technology that processes thousands of data points in real-time, smart pricing allows businesses to respond rapidly to dynamic market conditions.
Smart pricing determines the optimum price for sales, revenue, and profitability to give companies a competitive advantage. According to Accenture, intelligent pricing results in a 10 to 20 percent improvement in empowered sales, a 2 percent improvement in margins, and a 5 to 15 percent increase in revenues.
Let’s look at how smart pricing works and how it can bring value to your business.
What is a smart pricing strategy?
A holiday home will cost more to rent during the holiday period or close to a particular local event; you will pay less for Halloween costumes on Amazon the week after Halloween versus the week before, but how can a business manage all this pricing data? Smart pricing is the answer.
Previously, companies had to update their prices manually by considering things like competitors’ prices, market demand, and the cost of production. This was a laborious and inaccurate process. Prices would often be set too high — turning away customers — or too low — leaving profit on the table or damaging the brand image. By the time adjustments were made, the market had moved on.
Smart pricing is a form of dynamic pricing that uses real-time market and competitive data to set the optimum price automatically. It does this within the bounds of profitability so companies can set specific limits around the minimum and maximum price. This way, the business has tight control over revenue management and avoids unprofitable price wars.
Previously just the domain of the Alibabas of the world, the evolution of technology means that smart pricing strategies are now accessible, even to smaller businesses.
How does smart pricing work?
When implementing smart pricing, businesses set dynamic pricing rules based on various market factors. It will consider things such as:
- Real-time competitive pricing
- Supply and demand
- Cost of goods sold (COGS)
- Minimum price
- Maximum price
- Sales and promotional activities
- Historical pricing and sales data
Trusting an algorithm to make pricing decisions might seem like a leap, but a smart pricing tool can process vast volumes of data much faster than any human could. Setting pricing rules automatically allows businesses to test different prices, and the pricing software learns where the profitability sweet spots are.
A smart pricing strategy allows businesses to set rules like:
- Relative floor and ceiling prices vs. competitors, e.g., our prices should never be 10 percent more than our competitors or 5 percent below.
- Profitability limits, e.g., Our prices should never go below COGS plus $50.
- Average pricing metrics, e.g., our price should be 5 percent lower than the average of our competitors’ prices.
- Seasonality rules, e.g., our prices are 40 percent higher in December and January than our base price.
- Time-based rules, e.g., Six months out from the booking date, our prices are set at the base rate, but one week out from the booking, our prices are 70 percent more than the base rate.
Implementing smart pricing allows you to be flexible and reactive. A competitive advantage is gained while remaining within the guardrails of your minimum and maximum prices.
What is e-commerce smart pricing?
Smart pricing strategies have become synonymous with e-commerce. Comparison shopping engines mean customers can access the most competitive prices at their fingertips. This is great for consumers, but how can retailers keep up?
To keep their competitive edge, e-commerce retailers must respond to competitor prices in real-time. Smart pricing tools make recommendations based on machine learning.
For example, dynamic pricing technology analyzes competitor prices and provides a recommended price to capture revenue and market share while remaining profitable.
Smart pricing examples
The travel and tourism sectors are well-known for pioneering dynamic pricing strategies, which have become more sophisticated over time. But they are not the only ones. Let’s look at some examples of smart pricing strategies.
One of the most well-known intelligent pricing strategies was launched by Airbnb in 2016. The Airbnb smart pricing tool helps hosts to help them set the “ideal” nightly prices for their property listing at any given time. The algorithm considers factors such as local demand in your area, high season or low season, available amenities, the average number of people who view your listing, the average ratings and reviews of your property, types of rooms, availability, and similar listings. Airbnb’s smart pricing hasn’t been popular with everyone though. Some hosts claim it under-sells nightly prices to boost bookings, which it profits from, and it doesn’t consider things like the quality of furnishings and finishings.
Airlines are also famous for using dynamic pricing strategies to update their prices so fast it will make your head spin. We’ve all checked flight prices one day, only to return a few days later and find that they have increased. Airlines use smart pricing technology to set “ideal” real-time prices based on the availability of seats, the route’s popularity, the time of day, week, or year, and the time left until departure. The closer to the time of departure, the more you will pay. Aviation is a famously expensive industry to operate, so this dynamic pricing strategy allows airlines to maximize the price and number of seats sold on each flight.
Dynamic markets require agile pricing, and e-commerce behemoth Amanzon has been a trailblazer in this area. Aside from its unrivaled product offering and recommendations, Amazon also beats out the competition by consistently offering the most competitive prices (which are not always the lowest prices).
Its pricing teams do this by harnessing the power of machine learning and AI to track real-time market changes with impressive accuracy. The advanced algorithms analyze data and detect trends to produce effective price recommendations at break-neck speed.
Pros and cons of smart pricing
Activating smart pricing might seem like the magic ingredient for a successful business, but many factors are at play. Let’s take a closer look at some of the pros and cons of dynamic pricing.
Advantages of smart pricing
Avoid over or under-selling
The best price isn’t always the lowest. The ideal price is the one customers are most likely to accept while also generating positive profit margins. With intelligent pricing, companies can avoid charging too much or too little for their products or services.
Fast and automated
Today’s smart pricing technologies mean you can adopt a dynamic pricing strategy without resorting to thousands of spreadsheets. These pricing tools allow you to set your parameters. They then go to work, learning from your sales data, discovering patterns, and generating ideal prices much more rapidly than conventional price optimization strategies.
Keep pace with changing markets
Blink, and you’ll miss the changes occurring in today’s markets. Consumers are savvier than ever and have access to the tools they need to make smart purchasing decisions. They also have more choice than ever before, with e-commerce businesses of all sizes springing up across the globe. Smart pricing strategies allow enterprises to adapt to changing consumer behavior and capitalize on opportunities in real-time.
Disadvantages of smart pricing
Today’s consumers are always hunting for the “best deal.” Sudden and rapid price fluctuations can leave customers feeling annoyed and disgruntled. Research by Accenture found that 42 percent of consumers say they want companies to use their data securely and responsibly to customize pricing and promotions. Businesses must implement smart pricing strategies with care and consideration.
While intelligent pricing technology has become much more accessible, it still requires a sizable investment from businesses in both time and money. Moving from traditional price optimization to dynamic pricing requires a significant mindset shift internally and ample resources to set up the software, establish pricing rules, and onboard the relevant teams.
Is smart pricing right for your business?
Smart pricing could add significant value to your business if you operate in a fast-moving and dynamic market like travel, tourism, hospitality, or e-commerce. The time, money, and resources required to roll out smart pricing mean it lends itself to businesses operating in highly competitive markets with broad offerings and high volumes. The rapid adoption of smart pricing technology means your business may be forced to evolve or risk losing valuable market share.
We understand that the different kinds of pricing technology can be confusing. At Flintfox we are here to help you navigate the pricing technology eco-system. We would love to hear about the pricing challenges you are facing as a business, and work with you to figure out how we can help.
Find out how Flintfox’s powerful Pricing Engine can supercharge your business today.