The Amazon Effect: Dynamic Pricing Done Right
It’s no secret that Amazon is dominating the e-commerce market. Within a span of a few years, they managed to out-sell and out-perform former giants like Toys “R” Us, Barnes & Noble and even Macy’s—many of which were previously considered untouchable before Amazon came through and turned their respectable markets upside-down.
Arguably, several factors can be attributed to Amazon’s success in e-commerce; attributes such as excellent customer service, the appeal of a one-stop shopping experience, product diversification and simply being at the right place at the right time are often mentioned by those seeking to emulate Amazon’s success online. However, an important aspect of Amazon’s ability to dominate the e-commerce market remains underappreciated and is often completely overlooked. Amazon has created a pricing strategy designed to excel in the modern, rapidly-changing online retail market before other companies thought to do so, and it is in every online retailer’s best interest to have a good understanding of their methods.
Dynamic pricing for a dynamic market
Dynamic pricing refers to products—typically items sold online—with prices that change rapidly and sometimes drastically based on their respective markets. Rather than being overwhelmed by this fast-paced pricing dilemma, e-commerce stores like Amazon have used dynamic pricing to their advantage by adjusting their prices at the same rapid pace of market demand. By doing so, they remain one step ahead of their competition and nearly always have the most compelling offers faster than other retailers.
One important fact to note is that the “right” price is not always the lowest price. Many e-commerce companies have failed to observe this fact, and as a result end up in brutal promotional wars with competitors, losing precious profit margins in the process. Amazon, however, knows this fact all too well, and also considers this in their approach by utilizing KVI pricing and other strategies in their dynamic pricing methods.
Key Value Items (KVIs) and Key Value Categories (KVCs)
Identifying and managing KVCs and KVIs can make the difference between a customer buying no products at all versus a customer filling their cart with a multitude of items when shopping online. Key value categories, or KVCs, are notable categories of products within a store. Similarly, key value items (KVIs) are individual products that are considerably more important than other, less popular items in a store. Items in a retail store can be “key” for a multitude of reasons:
- Perceived value drivers: items that remain popular with customers for a long period of time
- Assortment perception drivers: product(s) which can persuade customers to buy other related items within a store
- Traffic drivers: high-demand products, particularly important for product categories that have high-volume, short-term demand, such as clothing items and accessories
- Basket drivers: products that are often bought in conjunction with other items, such as potting soil and flower seeds
Offline retailers already have a decent notion of KVIs and utilize them by offering promotional deals and optimizing their placement on store shelves by keeping them at eye-level. Online retailers like Amazon also consider KVIs in their pricing strategy via promotional deals combined with tools such as their recommended products engine to catch a customer’s eye whilst shopping. How many times do you think customers have bought additional items because “customers who have bought this product also like” another? This is a great example of how KVI pricing can change the purchasing habits of customers drastically.
Price Management in Modern Markets
Identifying KVIs and KVCs is a great step forward in remaining competitive online as a retailer. However, considering such data is only one small piece of the pricing puzzle if retailers want to learn from Amazon’s success. Recognizing factors such as dynamic pricing and KVI pricing is of little use unless proper action is taken to implement effective strategies. Price management has undergone a renaissance of sorts within the online retail industry due to dynamic pricing and technological advances. Companies that do not acknowledge the changes of the industry and adapt their price management strategies accordingly will find themselves far behind companies like Amazon in e-commerce, or worse, failing altogether like Toys “R” Us.
Dynamic pricing requires dynamic price management. Retailers are dealing with an exceptional price management crisis; there is more data than ever to process, and far less time to process it. Amazon is known for changing prices on products several times a day according to market demands. At such a rapid pace, pricing teams cannot create an array of excel sheets to record data, analyze pricing data and come to a timely decision as they did years prior.
Amazon paved the way for e-commerce companies in terms of price management by implementing new technologies into the price optimization process, such as machine learning, years before others thought to do so. By equipping their pricing teams with technologies like AI, Amazon manages to stay ahead of their competitors who struggle to adapt to dynamic pricing. Advanced algorithms are able to analyze data, detect patterns and price changes and produce effective price recommendations at a fraction of the speed of traditional price optimization strategies.
Price Management and Price Optimization Technologies
Amazon may have been ahead of their time in terms of implementing modern technologies into their pricing strategy. One important factor that allowed them to innovate so quickly and effectively was the fact that they have their own pricing teams and methods to try out the latest technology has to offer. Fortunately for smaller retailers, however, price management and price optimization technologies are not exclusively available to companies as large as Amazon anymore. Large strides have been made in the past few years regarding price management software and price optimization using machine learning.
Whether other large retailers wish to catch up with companies like Amazon, or mid-range retailers hope to optimize their pricing strategies despite having fewer resources to do so, the technology required for effective, dynamic pricing is more available and more affordable than ever. Change can be difficult, but for companies seeking to experience the full “Amazon effect” and thrive in the online retail sector, price management and price optimization technologies are an irreplaceable asset.
Nikolay Savin, Head of Product Competera, built the price optimization software for e-commerce and brick & mortar to achieve better results through the merge of data, machine learning and retail best practices.
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