Choose the right pricing strategy with confidence and leverage innovative technology.
Maybe I can get this cheaper somewhere else? Prices are a top priority when consumers decide what and where to buy. That’s why price management is one of the most critical factors for a retailer’s success. However, with quickly changing consumer trends, unpredictable economic dynamics and the ever-growing diversity of e-commerce, determining optimal prices has become more and more challenging.
While traditional methods fall short, new technology opens the door to improving margins and profitability. In this article, we’ll explore the core strategies, tools, and technologies that can help retailers navigate today’s pricing challenges successfully and maximize their market success.
What is retail price management?
Retail price management is the systematic process of setting and adjusting prices to meet business objectives such as profitability, market share growth, or brand positioning.
Retailers need to consider multiple factors when setting prices, including these three core considerations:
- Customer Demand: Retailers must know how much customers are willing to pay for a product. This requires analyzing demand elasticity—how sensitive customers are to changes in price. The challenge here is that the willingness to pay fluctuates depending on various factors, such as the time of year, place of purchase, and trust in the brand.
- Competitors: The more comparable products are, the more important the pricing of competitors is. Retailers must monitor competitors’ price changes to avoid losing market share or missing out on revenue opportunities. However, consistently undercutting competitors’ prices can jeopardize profitability, meaning that focusing solely on the competition is not a sufficient strategy.
- Costs: Prices must cover production, distribution, and operational costs to ensure profitability. Since prices are no longer calculated simply on the basis of costs plus margin but instead focus on the perceived value by customers, it has become all the more difficult to set optimal prices that ensure sufficient sales and do not drive away a large proportion of customers.
In a nutshell, effective price optimization is the dynamic process of balancing profitability and competitiveness, optimizing prices to retain customers without undermining margins.
Why effective price management is crucial
Price management is a necessity for every company. When retailers fail to adjust their prices to changing market conditions, they risk losing revenue, market share, and profitability, putting the whole organization in jeopardy. As challenging as it can be to optimize prices, the work pays off in multiple ways.
Maximized profit margins: Several studies, including one conducted by McKinsey, state that even if retailers only improve their prices by 1%, their profits will increase by up to 8%. Our own customer success can confirm these estimations.
One of our clients, Westwing, is a leading premium e-commerce retailer in the home & living sector, offering their collection and 3rd party products in more than 12 countries. With an expanding and rapidly changing assortment, the company wanted to better tailor prices for different regions and sales channels without relying on competitor prices alone. After implementing 7Learnings’ AI-driven price optimization, Westwing greatly improved their margin. You can read the full case study here.
Increased customer retention: Better prices create financial stability. How so? Prices have a positive relationship with brand trust, as Deloitte highlights in its Retail Industry Outlook 2024. Customers value retailers that offer prices they perceive as reasonable. They will be more loyal towards them and even defend them against criticism. For retailers, fair prices are one of the best tools to increase recurring revenue.
Improved market positioning: Last but not least, prices are a central factor in branding. Without elaborate campaigns, price levels and price models can clearly position a retailer – as a premium provider (prestige pricing), a discounter, a better option compared to the competition.
What are the most common and most effective pricing strategies?
There are various pricing strategies retailers can use to define optimal prices. Pricing strategies can complement each other and change over time. Which strategy fits best depends, among other things, on the product and the market position of the company. However, some strategies are clearly outdated and can no longer be recommended. Let’s take a closer look.
Cost-based pricing
Cost-based pricing is one of the oldest ways of setting prices. Retailers calculate production and operational costs, and then add a markup to ensure profit. This approach originated in times when market data was harder to access and businesses primarily relied on their internal data. The downside of cost-based pricing is its lack of market awareness and customer-centricity. Retailers might risk setting prices too high, driving customers away, or too low, missing out on margin.
Value-based pricing
Another way of price optimization is value-based pricing. Here, internal costs hardly play a role. The approach rather focuses on customers and their perception of a product’s value, which allows retailers to demand high prices independent of the actual production cost. A classic example of successful value-based pricing is Apple. The company created a brand image that stands for quality and innovation and makes customers willing to pay above-average prices.
“At Wave Connect, we’ve seen the effectiveness of value-based pricing in practice, particularly with our digital business cards that incorporate QR codes and NFC technology. By emphasizing the features that deliver real value—such as real-time updates, seamless CRM integration, and efficient lead capture—we’ve been able to price these products higher than traditional alternatives. Data from businesses using this technology shows a 30% improvement in lead capture efficiency, illustrating that when customers perceive a clear value in a product, they are willing to pay a premium. Instead of focusing on underlying production costs, this approach aligns price with customer perception, resulting in higher pricing power and customer loyalty.”
George El-Hage, CEO of Wave Connect
Competitor-based pricing
Competitor-based pricing is common for products that are easily comparable or very similar. Retailers monitor competitor price adjustments and try to match or undercut their prices quickly to not lose sales. The strategy comes with a high risk of eroding margins. Also, competitor pricing is purely reactive and neglects all other levers that could justify higher prices, like brand, product innovation, and customer service.
Promotional pricing
Promotional pricing is part of any well thought-out pricing strategy. Retailers can significantly increase sales in the short term with discounts and promotional events, such as Black Friday. Limited-time offers attract new customers as well as motivate existing customers to purchase again. However, retailers must ensure frequent discounting does not erode the perceived value of their brand and counteract their long term pricing goals.
Learn more about our performance marketing optimization solution.
Dynamic pricing
Dynamic pricing puts an emphasis on frequent and near real-time price adjustments based on factors like demand, competitor prices, and market trends. With the development of technology, dynamic pricing solutions have become common, especially in high-paced market environments like e-commerce.
While traditional tools could only take a few factors into account and work based on fixed and simple rules that weren’t updated quickly enough to keep up with the current pace of change in the markets, modern dynamic pricing tools work based on AI algorithms and thus deliver much better results.
According to a study of Boston Consulting Group, companies that switched to AI-driven pricing saw an increase in gross profit of 5% to 10% and also sustainable uplifts in revenue and improvements in customer value perception.
More and more retailers are adopting a dynamic pricing strategy. As Statista points out, 35% of e-commerce retailers in North America and Europe were either planning to introduce the new pricing model or were already benefiting from dynamic pricing in 2021.
Predictive pricing
Predictive pricing builds upon dynamic pricing and uses artificial intelligence and machine learning to forecast customer demand and price elasticity and recommend optimal price points for specific business goals. With AI-driven pricing, most of the manual effort for retail price management disappears, and retailers can achieve optimal prices on autopilot.
With the right predictive pricing strategy, retailers can increase their profits significantly. According to Accenture, AI-powered pricing can lead to revenue increases of up to 15%, growth in margins of up to 5%. In our experience, even bigger results are possible. One of our clients, Intersport Krumholz achieved a 118% uplift in profit by fine-tuning their pricing with 7Learnings.
The role of technology in retail price management
Complex, rapidly changing market dynamics and volatile economic situations have led to price optimization becoming more challenging than in past decades. Traditional, manual methods no longer deliver the desired results.
The sheer number of factors that successful price optimization needs to take into account nowadays is impossible to manage by hand. Manual data analysis takes too much time and is prone to human error. This is why price optimization software has become a must-have for retail price management.
As assortments expand, pricing strategies can be easily scaled when using software. Once properly configured, these tools eliminate errors and allow for dynamic price changes, almost in real-time. It’s important to note that human oversight remains crucial – decisions about which adjustments should be automated and which AI recommendations require further evaluation are still made by people. However, nobody questions the need for technological support anymore.
The question for retailers today is: what software to use? Automated price optimization tools that don’t incorporate AI are outdated. AI-based solutions have proven to be reliable, and their results are impressive, as confirmed by early studies. According to a Statista report, for example, retailers who utilized AI or machine learning saw a 14.2% increase in sales from 2023 to 2024, while those who did not only grew by 6.9%. However, there are major differences in the performance of AI algorithms.
The variety of price optimization tools on offer is enormous and is constantly increasing. The offerings are as varied as the companies themselves so that each retailer can find a suitable solution for its requirements:
- There are very niche pricing solutions like Repricer, a retail price management solution specifically for Amazon sellers, that uses AI to automate price adjustments.
- On the other end of the spectrum, there are the big tech consulting companies like Accenture that offer AI-based pricing solutions for a variety of use cases, which are, however, more accessible for big corporations.
- And then, there are solutions like 7Learnings that are suitable for a wide range of applications but, at the same time, are also affordable for medium-sized companies and offer predictive pricing for both online retailers and traditional SMEs.
Challenges in retail price management
Although price optimization tools simplify retail price management, numerous challenges remain that are not automatically solved by the use of technology.
Data Accuracy: For AI solutions to work effectively, algorithms need enough high-quality data to analyze. And that’s where lots of companies have some catching up to do. The best option to handle a lack of data or poor-quality data is to choose a software provider whose AI algorithm doesn’t need huge databases, as it is pre-trained and/or helps companies check and improve the quality of their data before implementing their pricing technology.
Balancing Short-Term and Long-Term Goals: Price managers often face pressure to deliver results quickly. And while there are strategies like promotional pricing or competitor-based pricing that can make a difference fast, retailers need to be careful to also keep long-term goals in focus. Predictive pricing is a game changer here, as it allows a peek into the future and helps balance short-term wins with long-term success.
Complexity of Customer Segmentation: Customer segmentation is complex, as different groups have varying price sensitivities and buying behaviors. Retailers must ensure they use software that supports detailed segmentation (country, demographics, behavioral differences), allowing them to optimize pricing for each segment effectively.
Regulatory Compliance: Staying compliant in price optimization can be challenging, especially in the European Union. Retailers must ensure that customer data is handled responsibly and in compliance with the law. Using software made in Europe, specifically designed to adhere to GDPR and similar regulations, helps retailers optimize pricing in accordance with data protection laws and minimize the risk of costly penalties.
Best practices for optimizing retail price management
Retailers who want to optimize their prices do not have to reinvent the wheel, but can use some best practices as a guide. Here are five cornerstones of state-of-the art price optimization.
Data-driven approach
Leverage AI algorithms to analyze internal and external data about customer behavior, sales, market trends, seasonality, location and more to base your pricing decision on a solid foundation. Use predictive pricing to decide from a broader perspective. And whenever possible and reasonable, automate price adjustments to benefit from short-term market dynamics.
For a deep dive into predictive pricing, download our free e-book!
Inventory-based pricing
Take inventory levels into account when steering prices. Price increases can make sense when inventory is limited and discounts can help clear excess stock and make room for new, more in demand products. Ideally, your pricing solution is synced with your inventory system and uses inventory levels as one data point to give price recommendations.
Regular price audits
Don’t trust your pricing solution blindly. Conduct reviews of your strategies regularly to identify opportunities for adjustments, ensuring that your configuration and database is as best as possible. Improve processes and technology where necessary to keep your competitive edge.
Customer feedback analysis
In addition to quantitative data, use qualitative research to better understand your customers’ price sensitivity and satisfaction. Gather insights by doing interviews and adjust your pricing strategy accordingly.
Cross-functional collaboration
Don’t work in silos. Pricing managers should work closely with marketing and sales to align pricing decisions. Otherwise, special discounts or promotions might be claimed successful in one department (lots of sales) but might undermine the overall profitability or brand image. At 7Learnings, our cross-marketing optimization has been designed to sync marketing and pricing and achieve an average uplift in profits of 15 percent.
Conclusion
Effective retail price management is essential to grow market share and boost profits. In today’s highly unpredictable markets, traditional approaches fall short. That’s why we are seeing a shift towards AI-based data-driven strategies that can now be considered the gold standard in price optimization.
With the fast-growing market of AI pricing solutions, retailers big or small can now find a tool that fits their budget and needs. They should also integrate AI into their efforts, as the algorithms are reliably superior to manual methods. If you want to explore how AI price optimization could accelerate your company’s success, contact our team. We are happy to show you 7Learnings capabilities in action and discuss any questions you might have.
