The Pricing Blog by Omnia Retail

It is New Year’s Eve, and you decided to go to a party. Together with your friends, you order an Uber via the Uber app and once you’ve opened it you get a notification: “Demand is off the charts! Fares have temporarily...

It is New Year’s Eve, and you decided to go to a party. Together with your friends, you order an Uber via the Uber app and once you’ve opened it you get a notification: “Demand is off the charts! Fares have temporarily increased to get more Ubers on the road. Your ride will be 2.1 times more expensive than normal.” Ever wondered what this phenomenon is called? This is an example of a surge pricing strategy. In this article, the definition of surge pricing will be explained followed by different occasions where surge pricing happens. Furthermore, both the use-cases, advantages, and disadvantages of surge-pricing will be discussed. At the end of the article, some practical advice will be given on how to implement surge pricing tactics within your pricing tooling. Definition Surge Pricing Surge pricing is a dynamic pricing method where prices are temporarily increased as a reaction to increased demand and mostly limited supply. Therefore, this form of dynamic pricing responds to market factors and helps to flexibly increase your prices. Surge pricing takes place in all kinds of industries, such as hospitality, tourism, entertainment, and of course in retail. Surge pricing can often be linked to time-based pricing. This dynamic pricing tactic changes prices depending on the time of day and expected or real-time measured high demand peaks. Research showed that customers shop online mostly during weekly office hours and therefore online retailers raise prices during the morning and the afternoon, between 9 AM and 5 PM. When the evening starts, prices can then be lowered again to a normal level to react dynamically to market demand and only surge prices on times related to high demand. Another example of surge pricing connected directly to time-based pricing is during special events. When for example the Grand Slam is organized, demand for certain tennis products increases. During these moments, surge pricing tactics are often applied. Secondly, surge-pricing can also be connected to weather-based pricing. This approach incorporates the weather forecast in pricing decisions and once the weather conditions are favorable for a product category surge-pricing is applied. Imagine you are selling BBQs and the weather forecast for next week looks promising for the first time this summer. As a pricing strategist, you might want to increase prices as soon as possible, because of the higher expected demand for BBQs. The third most frequently used surge-pricing tactic is location-based pricing. When this dynamic pricing method is used, selling prices are adjusted upon the geographical location of the buyer. Surge-pricing can often be noticed in crowded cities or locations with high-income populations. In these cities, an elevated willingness to pay can be noticed. Places, where the cost of goods sold is higher due to above-average shipping costs, are another example of cities where prices often surge. Explanation source: above the supply and demand curves of a market are shown. When increased demand can be noticed, the demand curve will shift to the right. With a stable supply curve, this will automatically increase the quantity to a higher temporary equilibrium level (Q2). When demand increases and supply stays the same, the new price in the market (P2) will be at a higher level than before. A company that openly applies surge-pricing tactics and informs its customers about it, is Uber. Whenever there is high demand for taxis, often caused at rush hours or other peak periods such as special events or bad weather and not many drivers are on the road, consumers will see an increase in price. This price increase will have an immediate effect on demand, making sure that the ones that really need a taxi will get one and pay more, whilst people that can wait a little longer will postpone their journey until prices are back to normal. On the other hand, it could also affect supply, because more Uber drivers are willing to start driving when they can earn more per ride. Uber applies a pricing logic of multiplying standard rates during these high-demand periods. These multipliers are calculated in real-time and change rapidly. In this example of Uber, the size of the pricing multiplier is based on the intensity of market demand due to for example peak times or bad weather. Furthermore, multipliers differ from each other based on geographical location. By being transparent about the multiplier to consumers in the app, Uber takes away any ambiguity and lets the consumer decide upon their buying behavior without jeopardizing bad price perceptions. source: business insider Why do companies decide to use surge pricing and to which commercial goals does it connect? Surge-pricing is often used as a pricing method in the following scenarios: High demand cannot be served and needs to be controlled. A combination of high demand, stable supply, and little elastic products result in higher margins to be gained When high demand occurs and supply cannot be guaranteed, surge pricing can be used as a method to control demand and supply. Therefore, sellers want to shift sales towards the consumers with a higher need or a higher willingness to pay. When prices increase, consumers can make two decisions. Either they decide to still buy the product or service or they decide to postpone their purchase because the higher price does not fit their individual demand curve anymore. When their need is still high enough and the increased price will fit their willingness to pay, consumers will continue the transactions regardless of the price increase. Due to this natural filtering method, only a smaller group of consumers must be served and this is rebalancing the high-demand period. Although the demand in retail does not fluctuate as rapidly as in the taxi industry, there are still many opportunities to use surge pricing on a daily basis in the retail sector. For instance, surge pricing is often used when stock levels are running extremely low or when delivery problems of the products occur. In these cases, high demand is preferably slowed down by increasing prices and therefore shifting demand to the consumers with a higher need or willingness to pay. Periodically increased demand in combination with stable supply and products that are not highly elastic can result in temporary higher prices. When this opportunity presents itself in the market, organizations often want to take advantage of it and increase profit margins on their products. Do note that surge pricing only works when the supply is limited and products are not very elastic. In case the supply is not limited, the overall stock is high or additional supply can be purchased, it is probably not wise to increase prices. In that case, customers will normally still have purchasing options at competitors and it is most often better to keep the prices stable and increase your turnover. In retail peak periods such as the holiday season in December, seasonal advantages are always combined with surge pricing tactics. Furthermore, more and more retailers are using data to predict high-demand periods in advance and anticipate this by increasing prices. Applying a surge-pricing tactic when demand is high will help to achieve commercial goals such as maximizing revenues or maximizing margins. Pros and Cons of Surge-pricing Advantages Surge pricing offers benefits for your organization since it directly and dynamically adjusts prices upon market dynamics. Therefore, inefficiencies in your operations will diminish or not even exist at all. Anticipating higher demand by increasing prices will be advantageous for your company’s profits and logistics once a potential negative consumer price perception is taken good care of. Running out of stock could be prevented when surge-pricing is applied, and margins increase. Disadvantages The challenge of surge pricing is not to harm your consumer’s price perception. When prices are surging too often or at unreal times, consumers might perceive your surge pricing tactic as insulting. This could result in less loyalty from your customer base, a negative effect on your reputation, and potentially cost you valuable sales. Surge pricing therefore should be combined with extensive market research and price increases should only be applied when data shows a similar move from your main competitors or when your internal data points, such as stock levels or other logistics, leave you no other room. Adding a pricing rule that sets a maximum price per category or product group will also limit risks of bad price perception but will enable you to get a better margin when demand is high. Furthermore, your organization should build in enough flexibility to be able to dynamically adjust prices downwards quickly when the effects of previously surged prices are not as desired. How could you use surge pricing in your pricing strategy and implement it in Omnia? Surge-pricing will become more visible in retail once the electronic shelf labels are more commonly seen in stores. Because of the possibility of changing prices electronically at every moment of the day, surge-pricing would be feasible. Time-based pricing Did you know that Omnia offers the opportunity to implement pricing conditions based on specified dates and times? More about these formulas and how to use them are explained in the following article. The most frequently seen use-case of time-based pricing is promotional pricing. Weather-based pricing Furthermore, Omnia offers the option to set up a Google Weather API. This way, the weather forecast of a chosen city can be imported into Omnia and used for pricing purposes. More about this feature can be read in this article. Geographical pricing With Omnia’s flexibility of use, it is possible to set up distinct pricing strategies per channel or per country. By means of the various channels in your Omnia portal, your organization is technically enabled to create price advice per country. For different countries, Omnia always advises creating a pricing strategy that is tailored towards the dynamics of that specific market and setting up a separate environment for each country. Our consultants can advise you on the preferred setup within Omnia. Conclusion Surge-pricing could be beneficial for your company whenever you would like to tackle high-demand peaks and take advantage of them by using different pricing tactics. Increasing your prices during favorable times, weather conditions, or other high-demand periods will drive profitable growth. Feel free to reach out to our customer service or your CSM if you have any questions about this topic.

Consumer prices increased by 5.4% last June compared to the year before. Inflation is rising with high speed and challenging times for retailers and brands are present. The uncertain economic environment and rising...

Consumer prices increased by 5.4% last June compared to the year before. Inflation is rising with high speed and challenging times for retailers and brands are present. The uncertain economic environment and rising purchase prices seem to have paired up with some inconvenient occurrences, such as the blocked Suez Canal or the current chip shortages. Whether your company directly faces pricing challenges due to supply shortage, logistical constraints, or limited production, almost all organizations face the same challenge nowadays: how do we protect our margins with cost prices increasing without harming our customer relationships and their price perception? These times request a different pricing approach and adjustments in your pricing strategy. How and when to tackle margin erosions, still drive profitable growth and take strategic control over this new situation requires a thorough understanding and monitoring of the market besides a critical viewpoint on your own internal strengths and weaknesses. To guide you through this period and even transform the challenge into an opportunity for the future, Omnia is here to help. In this article we will discuss and we will guide you through some steps you can take and potential pricing tactics you could apply. How to approach this challenging situation? Rising purchase prices can either be passed on to consumers, it will get absorbed elsewhere in the supply chain or it might result in margin erosion. When there is no other option than to increase the prices of your offerings to your consumers you need to consider the right approach. Questions such as “how to time price increases” and “for which assortment group should prices be increased first” will have to be answered in advance. To guide you through this process, there are a few steps that you could consider: 1. Don’t lose eye on your value proposition, mission, and vision statement. This will guide you to the right decision on your timing (follower versus leader) and pricing position. 2. Monitor the market and the pricing moves of your main competitors/resellers. In these times of inflation, taking the role of a follower might be your strategic move. However, fast response is essential to both maintain your ideal price position as well as not losing margins over extended periods of time. 3. When you need to increase prices of your offerings to stop margin erosion you need to take a close look at your pricing and sales data and divide your assortment into different groups. In this way your organization could make a well thought-through pricing decision per product group: a. Demand-based: Elastic products versus inelastic products and heterogeneity of products for different customer groups b. Supply-based: Products that you simply cannot deliver, or stock is running out c. Product-based: Products with value-added services 4. Define clear and quantifiable objectives for each product group and think about alternative strategic plans when price increases do not work out intendedly. 5. Adjust your communication and marketing efforts to your ‘new’ pricing strategy. 6. Keep monitoring the market again and again and be able to adjust your pricing flexibly and dynamically. How to divide your assortment and determine your pricing strategy per product group When step three needs to be taken and your assortment is divided in several groups, you can start the pricing strategy implementation in Omnia. Below the three approaches and its pricing implications are described in more detail. Demand-based: Value-based pricing and elastic products versus inelastic products Due to government’s relief packages and the savings of most households during the Covid-pandemic, pent-up demand can be noticed nowadays, and strong consumerism is shown after a period of decreased spending. This increase in demand contributes even more to the current price inflations. Especially when increasing consumer prices, it is incredibly important to take elasticity levels per category or product group into account. Elasticities can be used to make predictions on sales results after a price change. With increasing cost prices and the need to increase consumer prices to prevent margin erosion, it is useful to monitor those elasticity buckets closely to determine its effect on sales. This will help your organization to considerably increase prices for the right product groups without risking unexpected drops in demand. As part of Dynamic Pricing, Omnia’s elasticity algorithm can calculate elasticities on a category level. This will provide you with the most recent insights into the elasticity-levels of your assortment. In your pricing strategy you can adjust price setting towards those elasticities and increase prices of the less elastic or inelastic categories first. Supply-based: Products that you simply cannot deliver, or stock is running out Logistical shipment challenges and global labour and materials shortages result besides increasing manufacturing costs in limited stock levels. Many organizations face delivery problems and need to tell their customers more often that a product is not available. First, the increased manufacturing costs requires a shift to being more cost-plus focused when setting your price. Your pricing strategy requires price tactics that protect your margins or reach predefined markup targets. With Omnia’s limit actions it is possible to integrate margin and mark-up requirements and automate your pricing strategy so that marginal targets are always reached. Please be aware of the different implementation needs of mark-up target versus margin target. Markup can simply be implemented as a certain percentage on top of your purchase price whilst margin needs to be calculated as a percentage of your selling price. Furthermore, with the implementation of a stock-based strategy, your organization can automate alignment between supply and demand based on real-time inventory data. Price advice can therefore be dynamically adjusted to market dynamics and your own internal stock-constraints. A low stock level might result in a higher price to protect yourselves against having to sell ‘no’ to customers. On the other hand, pricing might be used as an asset to control limited stock levels at this moment in time to stabilize deliveries until peak periods such as Black Friday. All stock-related data points can be used to set your pricing rules upon, from days of sales inventory to amount in stock. Especially when reorders are hard and it takes a long time to restock, you don’t want to run out of popular products, whilst your competitors do have them available still. Product-based: Products with value-added services Preservation of trust and loyalty of your customers is often at risk with significant price increases. A series of pricing adjustments might awaken your customers and steer them into using price comparison websites again to make the trade-off where they want to buy instead of buying it directly from you. Therefore, careful measures are needed, and pricing decisions made on product-based features might be helpful. When facing the need to increase prices to prevent margin erosion, a third way to decide upon your pricing tactics is to determine cross-sell opportunities and bundle popular products with value-adding long-tail assortment or value-adding services. In this way, you balance out margin gains across your assortment without risking too much harm to your customer price perceptions for popular or your best-selling products. With a High-runner strategy you are able to determine the best-selling products by means of real-time sales data and product popularity variables, such as unique product pageviews. Omnia’s reporting options in combination with the Google Analytics API, offer you the opportunity to get insights into your popular products versus your long-tail assortment. When setting your pricing strategies upon those different groups, it is best to first increase margin on your long-tail products that are bundled up with your high-runners. Conclusions Finally, it might be useful to already think ahead and start planning your future pricing tactics when all the dust is settled in the future and inflation is back to normal. Is it going to be your aim to restore prices to the level they were before or does this era provide an opportunity in the future to increase profitability and compete on another level for some categories? In these challenging but interesting times, feel free to reach out to your customer success manager to discuss the possibilities to optimally let Omnia work for you.

Product life cycle is a well known retail concept that is vital for brands and distributors alike when they go to the market with a new product. For professionals throughout the industry guiding a product through its...

Product life cycle is a well known retail concept that is vital for brands and distributors alike when they go to the market with a new product. For professionals throughout the industry guiding a product through its journey is second-nature, incorporating the concept as part of a pricing strategy, however, is not so widespread. Nevertheless, in pursuit of better turnover and margins, the PLC is an important consideration, giving you the perfect handhold to adjust your pricing strategy. Do you want to be the cheapest for the PS5 (or the accessories for it) in its introduction phase while supply is short? Or do you introduce an innovative product that no consumer knows yet? Do you want to step away from the RRP as a direct-to-consumer brand in the growth stage or do you wait until the product is more mature? These types of decisions should be part of your pricing strategy and can set you apart from your competitors. How should Nokia have priced their indestructible mobile phones, whilst being in a rapid declining phase? What is a product life cycle? A product’s life cycle portrays the length of time a product is in the market; from the beginning of its introduction to consumers until it is removed from shelves and phased out. This cycle is often divided into four phases: introduction, growth, maturity, and decline. Depending on the relevant stage, companies will set an according strategy to achieve their desired targets. Pricing and promotions play a pivotal role in the design of these product life cycle strategies. Therefore, product life cycle management, the process of strategizing ways to continuously support and maintain a product, is seen more and more at pricing mature players and could bring real value to your company. Introduction phase: during the introduction phase, the new product is introduced to consumers and a substantial amount of money is invested in advertising and marketing campaigns to bring awareness of the product to the customer. In this phase competition is low, but units sold will also correspondingly be quite low as well still. Consumers need to be convinced of the benefits of the product. Lots of articles never make it beyond this phase: e.g. 3D televisions. Growth phase: when it’s shown there is proven demand for the product and consumers are buying it, the next stage will be its growth phase. This phase is punctuated by increasing demand, increasing production and an increase in the competitive landscape. Availability of the product is understandably paramount during this phase, going out of stock is unthinkable during the growth period. The electric car is an example of a product that is currently in the midst of the growth phase. Maturity phase: normally the maturity phase is the phase that is characterized by declining production and marketing costs due to synergies and economies of scale. During this phase the first signs of market saturation occur and most consumers or households already own the product. Sales numbers still grow, but at a slower pace. In the maturity phase, price competition becomes intense, a broader range of distribution channels are deployed and competition is more focused on competitive pricing, marginal product differences or the difference in services or promotions. This period in the PLC is often said to be the ‘cash-cow period’. That being said, the idea of ‘Maturity from the start’ also exists. This occurs when a brand decides to launch a product extension and directly follows up the maturity phase of an earlier version of the product. For example, the iPhoneX followed up from the ‘normal’ iPhone-series and therefore the iPhoneX never had to undergo the introduction or growth phase, but immediately started in its maturity phase. Decline phase: the final phase of the PLC is entered once the product loses market share to other, newer products and the competitive landscape becomes too hard to survive. During this stage, demand declines, companies are left with overstock with prices and margins getting depressed. Therefore retailers and brands normally start stunting with promotions during the decline of the PLC to sell their final stock. A well-known example of a product that has been through the decline phase were the Nokia phones; sales results dramatically decreased after the introduction of the iPhone. Brand versus Retail: In the PLC and its connected strategies it is important to make a clear distinction between retailers and brands. Brands normally tend to use PLC strategies in a more advanced way and are usually more aware of the different strategic possibilities per stage. Retailers, however, could still gain from a lot of the benefits of incorporating PLC strategies and move dynamically over time according to the different life cycle stages their assortment is in. It is often perceived that brands price their products against value solely. However, it eventually becomes just as important to price in line with the market during the various phases of the product lifecycle. Otherwise, price perception of consumers can be damaged heavily or for direct-to-consumer sellers it will result in consumers shifting to other parties to buy the product. Brands could for example use a price skimming strategy for the different stages of a product life cycle: when customer demand is high due to a new release, the price is set to attract the most revenue. After the initial fervor and hype wanes, a brand adjusts price points to suit more consumers in the market. Brands might initially leverage price skimming strategies to take market attention and share away from their main rivals. Whereas a brand sets the price neatly in line with other products and step-by-step declines the prices based on the product life cycle stage, a retailer is way more dependent on the dynamics of the market in setting their prices. As a retailer, you should be adjusting your pricing strategy depending on the phases of the life cycle. As a retailer, therefore, you need to decide between penetration pricing, or price skimming during the introduction and growth phase, whilst for example switching to more advanced stock-based pricing, promotional pricing or even MAP-pricing when the final decline stage has arrived. How to incorporate PLC in your pricing strategy: Introduction phase: Retailer As it is up to retailers to respond to the price setting and potential regulations of the brand, for them, price setting in the introduction phase is a decision based on their own companies’ strengths, unique selling points, market positioning and other factors such as supply levels. Some of the questions you could ask yourself to determine the desired pricing strategy, are: -Am I a first mover or one of the only ones in the market introducing this product? -How do I want to be positioned in the market? Am I perceived as an expensive seller or a competitive seller? -Is there already some demand for the product? -Is there enough supply? How are my logistics managed? Based on the answers to these questions, most retailers either make a decision for a penetration pricing strategy or choose for a price skimming strategy. Where a penetration strategy helps retailers to gain consumer’s attention and penetrate the market by pricing products low, a price skimming strategy is often chosen for when a retailer wants to quickly earn profit. Brand Although the introduction phase is characterized by uncertainties over whether a product will find favour with consumers, brands normally set a high price ceiling for new products after an intensive period of market analysis and high consumer demand during the introduction phase. In the introduction phase they will work with a value-based pricing strategy and set the price with the aim of attracting most revenue. Brands and direct-to-consumer sellers most often use a price skimming strategy for the different stages of a product life cycle: when customer demand is high due to a new release, the price is set to attract the most revenue. Growth phase: Retailer Normally, only industry-specialty shops will sell a relatively new product, but once the value to consumers is provided and more consumers adopt the product, more sellers will add this product to their assortment and the competitive landscape will expand. A recent example of this is the Robotic Vacuum Cleaner. When introduced, only electronics shops, such as Mediamarkt or EP in the Netherlands offered the product. However, now that the product is moving to the final stage of the growth phase, shops such as Lidl have started selling these robotic vacuum cleaners as well. Multiple different sellers entering the market will require action in terms of your pricing strategy to stay on top of the game. In the growth phase you therefore see different strategies being applied. One market player might want to pursue growing market share over margins protecting margins by being more competitive. Another retailer might be adopting a competitor-based strategy and will be affected by the growing number of competitors in the market. On the other hand, retailers might also still decide to pursue a price skimming strategy and wait with lowering their prices until the maturity or even decline phase kicks in. Therefore a fair question you need to ask yourself during this lifecycle phase is: what kind of growth do you envision? Is this growth focused on market share or growth targeted to increasing margins? Brand During the growth phase, brands normally pursue their price skimming strategy. Although this normally transitions from a value-based perspective more into a demand-based perspective. Maturity phase: Retailer During this phase, the ‘cash-cow’-stage, the focus can be shifted more towards marginal targets. As the market and the product matures, margin-based pricing strategies or more value-based pricing strategies are often used for products in this lifecycle stage. At the end of the maturity phase, the competitive landscape will have become too intense to make profitable or even positive margins. When this happens, the PLC will transition to the next phase, the decline phase. Brand After the initial fervor and hype wanes, a brand adjusts price points to suit more consumers in the market. Brands might initially leverage price skimming strategies to take market attention and share away from their main rivals. During this 3rd stage, brands tend to move more towards a competitor-based strategy. Decline phase: Retailer When a product in your assortment enters the final stage of the PLC, there are various questions you could ask yourself to determine the cause: -Are my competitors gaining market share and do consumers prefer competitors over us to buy the product from? -Are consumers no longer interested in this product? Has a new innovation taken over? -Does the product no longer provide profit for our company? Normally this phase is defined by removing overstock or selling the final pieces of end-of-life products. Therefore, this goes hand in hand with promotions or lowering prices to get these products off the shelves and decrease inventory. During this phase it is wise to price way more competitively, live up to the MAP-pricing regulations, and to use stock-based pricing strategies to manage and track your stock levels to make sure that you sell the final pieces of your end-of-life assortment. Another often-used strategy during the decline phase is Bundle Pricing. Bundling products helps to sell the declining product and increase sales at the same time on the bundled, and often high-margin, goods. Brand This is the phase where another new layer of consumers could be accommodated once a direct-to-consumer brand decided to lower the prices more and thus use a price skimming strategy. During this phase, brands want to get their end-of-life assortment sold and start using dynamic promotions to set their pricing. Another strategy that you often come across with during this final life cycle stage is a Bundle Pricing strategy. In this way a brand might compensate for the loss of margin on the end-of-life product with a high margin on the bundled products. Example of a Product Life cycle adjusting to several pricing strategies for Retail: Example of a Product Life cycle adjusting to several pricing strategies for Brands: How to use this within Omnia? First of all, you need to determine an indicator to distinguish between the four lifecycle stages or to import the stock age into Omnia and depend on this phase. In Omnia it is also possible to import dates and to use the stock age or the amount of days a product is live on your e-commerce website to determine the ‘lifecycle stage’. Therefore, there are multiple ways to make a distinction between the four stages of the PLC and to import this into Omnia. When the indicator is imported into Omnia, you can make use of this to determine the assortment condition in the business rules based upon the lifecycle stage, stock age, specified dates, or the amount of days a product is live, in stock or available since the first introduction. For each lifecycle phase, determine the required action and strategy you would like to apply. Then, select the required action to reach the desired target and enrich your strategy incorporating the PLC phases in it.