Price optimization in retail needs to be a well-oiled machine that works for the retailer’s brand and business goals and it needs to be able to weather the storms of stockouts, seasonal changes, and cost fluctuations.
Understandably, when I speak to retail operators, one of top three questions I am asked is -
I know I need to invest in pricing intelligence, but should I build or should I buy my price optimization software?
So, after hundreds of conversations of this nature, this blog post is for those retail operators who are in the process of making this build-versus-buy decision.
Often, retail operators will have good reasons to be worried about buying off-the-shelf price optimization software. The most commonly heard objections I come across are -
“Our business model is unique, and we don’t want software that isn’t built for our unique marketplace/channel/MAP constraints.”
"Pricing strategy is make-or-break for us. We don’t feel comfortable outsourcing this to a third party"
"We are jealously protective of our pricing strategy, so we won't get a 3rd party involved"
"We know exactly what we need to build; we now just need to hire a team to do it."
These are all understandable concerns. When my team and I built pricing tech at Uber, our use case was so nuanced and complicated that we never considered buying pricing tech at the company. We had the budget, the team, and the time to build this in-house, and boy, were we right!
However, the right decision for Uber might not be the right decision for you. So, how should go about making this decision?
Having had this conversation on conference floors, phone calls, and Linkedin messages, I’ve started to develop a framework to help retailers get to the right answer for their business. There are three parts to this framework, and if your answer to all three parts is YES, you should consider buying a pricing solution.
Not all retail businesses are candidates for price optimization.
For example, a business that is small (<$5 million in annual revenue) is better served with a less-complicated approach of cost-plus-target-margin pricing. As a small business, you have a lot of things to worry about, and a complicated pricing system is not a priority for you.
Businesses that are heavily governed by brand or marketing-influenced pricing might also choose not to invest in price optimization software. For instance, a DTC brand selling <20 SKUs that are carefully positioned doesn’t need any pricing intelligence.
Lastly, any business that is governed by MSRP pricing that can’t be renegotiated doesn’t need price optimization. If you don’t have the flexibility to make at least one price adjustment a quarter, you are better served with traditional spreadsheet-based pricing.
For everyone else, regardless of your constraints, you need to think about how you’re making your pricing decisions.
Perhaps you have a stable business with a loyal customer base whose price elasticities don’t change very much. You haven’t changed base prices in years - at most, you do a few seasonal promos during Black Friday/Cyber and other major holidays.
Or, perhaps you have a steady margin target of 50%, and you get by with applying that margin target to your costs.
If your business has that kind of stability where pricing strategy remains a “solved problem” once it’s applied once, then you don’t need a price optimization solution.
If you experience the volatility of operating in an environment with factors such as fast-moving competitors, unpredictable consumer behaviors, and changing COGS, you need a Swiss army knife of a pricing strategy: One that is flexible enough to adapt to new data to generate new strategies.
All right, you’ve answered yes to the first two questions. You DO need price optimization, and you DO have a pricing strategy that is a moving target. So here comes the most important question – “Can you build it?”
Too many retailers will answer YES to this question, and then are stuck with a half-built, barely working solution that doesn’t work unless Jane from ops, operates it on her Windows Vista, while standing at the west-facing window of the office at 3 am on a full moon night (thanks Jane!)
Research in the price optimization space is growing by leaps and bounds, and that means retailers have access to more accurate, more imaginative, and faster pricing tech at their fingertips – if they know where to look.
If you’re a software powerhouse with an army of data scientists to allocate to the problem, then yes, you should go build! Otherwise, it can be a competitive advantage to get access to the best-in-class science, with teams of people dedicated to thinking about the problem.
Speaking of best-in-class science, if you’ve answered YES to all three questions and would like to learn about what Price Optimization software is right for your retail business, get in touch with us for a consultation call here.