E-commerce price optimization is key to operating an online store

We all remember Goldilocks and the Three Bears, right? In the classic fairytale, Goldilocks tries three bowls of porridge: one that was too hot, one that was too cold, and one that was just right.

Bowls of porridge are very much like prices for products; there’s a sweet spot that’s just right, and merchants and retailers should be aware of this when operating their e-commerce stores.

What is e-commerce price optimization?

E-commerce price optimization, sometimes referred to as dynamic pricing, simply refers to attempting to come up with the best price point for products based on the market demand. It’s an active process wherein merchants have a constant understanding of how their prices stack up against the competition and adjust accordingly to best optimize the balance between a good sales margin and a healthy sales volume.

• It’s an approach that sits in contrast to the conventional pricing model where retailers determine a profit margin based on the cost of goods sold without any adjustments.
• E-commerce price optimization could technically be a manual process, but in today’s online world in which consumers have so many more options and are increasingly tech-savvy, merchants and retailers need technology to effect this on their own at scale, Burc Tanir, CEO of Prisync, a pricing optimization software firm, told Retail Brew.

“Having the capability of continuously monitoring what your competitors are charging for the same item is actually a technological challenge,” he said. “Because typically, in most cases, merchants, like e-commerce sellers, are doing this in a manual way. If you imagine that you are doing this for your hundreds or thousands of products…it’s nearly impossible to conduct this analysis on a daily, weekly basis.”

How does it work?

Prisync is just one of many pricing optimization tools out there that are available to merchants. A shortlist includes: Price2Spy, Vendavo, Omnia Dynamic Pricing, and Sku Grid. Some software works better depending on the e-commerce platform a store lives in—Amazon, WooCommerce, Shopify, etc.—or what kind of business model or products a retailer uses.

Many of these softwares use AI and/or machine learning to highlight daily price fluctuations. So, for example, if you spot all of your competitors increasing prices on a certain product, that’s probably a good indicator for you to follow suit, Tanir said. If you don’t, you might potentially be underpricing your product, which will eat into your profits.

In addition to competitive pricing monitoring technology, some software and services recalculate price points on an item every day with fresh data generated by the competitive price tracking component.

• The software comes up with a new price point for that item and automatically changes that on the online store.
• For example, a merchant could type into the software that they would like to remain 5% cheaper than the lowest-priced competitors, excluding XYZ, as long as a 10% profit margin is maintained.

“If you can really streamline this process by automatically tracking competitor prices, and automatically adjusting your prices thanks to integrations available, that is what I call ‘end-to-end pricing optimization,’” Tanir said.

What are the pitfalls?

There’s a chance that by tracking competitor pricing, retailers and merchants might lose sight of profitability in what Tanir described as “a race to the bottom.” There are two sides to the pricing game—competitiveness and profitability—and retailers should always keep profit margins in mind when balancing these two components.

If you’re too competitive and chase the cheapest products across the board, then you run the risk of selling at a loss for a high volume of items, which ultimately kneecaps profit margins.

• Tanir said merchants don’t need to be competitive for all their products because not all products are created equal. Meaning, some consumers might be looking for the best deal for an iPhone, but not necessarily for a cable or other accessories for the phone.
• Prisync recommends its clients identify their key items in the market and price them competitively. But on other products, it’s fine to use the “old-school way,” according to Tanir.

“I think really adopting the whole idea for the whole assortment is also maybe a pitfall because, again, this might end up [with] you underpricing [and] leaving money on the table,” he said.