Defining Dynamic Pricing Rules

Mihir Kittur, Co-founder and Chief Innovation Officer, Ugam,

Defining Dynamic Pricing RulesSetting up dynamic pricing can be a tricky process so we’ve put together some tips and best practices to help you get started.

The ability to automatically lower, raise or keep prices the same is made possible by using an analytics-driven Rules Engine. Within this, analysts or category managers can create a set of conditional rules that dictate how your prices will change in response to competitor’s price changes or other market conditions.

Given that your competitors could be adjusting pricing by the hour or minute, you can set up the rules engine to make price adjustments on a regular basis but alert you when there is an unusual circumstance that requires human intervention.

The rules you set up can be based on geography, actions of specific competitors or the relationship between any two products, categories or brands. Below are three types of rules for you to consider implementing with your dynamic pricing strategy:

Rule Type #1 – Strategy Rules
Roughly 90% of the commands programmed into the Rules Engine are Strategy Rules, which are based on specific goals and specific competitors. When programing them in, you should ask the following questions:

  • Do you want the item to be the cheapest on the market, the priciest or in the middle?
  • What is the lowest acceptable margin?
Strategy rules can also be set up to keep tabs on price changes for KVIs at specific stores, and you can have them adjust your pricing according to these changes.

Rule Type #2 – Ladder Rule
With a ladder rule, you can create an algorithm that permanently defines the relationship between two products or product categories. This is usually added on top of a Strategy Rule to enforce a guiding retail principal, such as:
  1. Saving money by purchasing in bulk; or
  2. Always paying less for a generic or private label product than a brand name product.
Let’s say you are selling cases of bottled water as well as individual bottles. If the price of an individual bottle is lowered or raised, the price for a case needs to change accordingly to maintain the reward for purchasing in bulk.

Similarly, if your store is having a promotion on Pepsi or Coca-Cola, your store-brand cola needs to proportionally drop in price to maintain the practice of generic products being the cheapest.

Rule Type #3 – Zone Rule
The zone rule recognizes that the cost of living is higher in New York City verses Tulsa, Oklahoma, for instance. You can set higher or lower prices based on where the product is sold. This correlates with the trend of national chains such as Home Depot or Lowe’s charging different online prices based on ZIP Codes. Zone rules can also be used to reward loyalty card or store-brand credit card holders with special pricing.

What if the Rules Engine Makes a Mistake?
With any automating technology, there is always concern about error but a dynamic pricing rules engine has checks and balances in place to make sure that the software doesn’t start making irrational decisions on your behalf. You can also set up alerts in the system that notify you if your price or a competitor’s price has dropped or increased by a certain percentage (e.g., 50%) so you can manually intervene.

As online retailers get tech savvy with each other and dynamic pricing becomes the norm, having a dynamic pricing rules engine in place will only serve to help you remain competitive and able to stay on top of it all. For more on dynamic pricing overall, check out our eBook, Pricing Intelligence 2.0.

Defining Dynamic Pricing Rules

The Author:
Mihir Kittur is a Co-founder and Chief Innovation Officer at Ugam. He oversees sales, marketing and innovation and works with leading retailers and brands with insights and analytics solutions around their category decisions to improve business performance.


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