Pricing Rules
For eCommerce And Retail Companies
1

## What Are Pricing Rules?

As is evident from the name, pricing rules are rules for price calculations.

A pricing rule is a set of formulas, if-then conditions, constraints and priorities.
Typically, variables in such formulas / conditions / constraints are:

competitors' prices,
cost prices,
stocks,
inventory turnover,
supply dates,
acceptable range of markups,
demand / sales forecasts,
...
Rules are formalized price calculating logics, which are, generally, written down in a document. Such manuals describe the company's pricing strategies and how to set and adjust the price in various situations.
Example:

In a city A, in this segment of goods, the price of an item is equal to the maximum of the two following values:
value 1 = the second minimal price of the market, compared to local competitors,
value 2 = (cost price + 10%).
Retailers and e-commerce companies utilize these documents for price calculations in one of the following ways:
manual calculations,
fully automated calculations with a dynamic pricing software.

The level of automation depends on the amount of computation required and how fast the price has to react to the change of some variable, for instance, to cost price changing or the key competitor's price changing.
Example:

Your company manufactures premium aluminium bumper frames for iPhone. It offers 10 types of frames and sells them through the website and Instagram.
In your country nobody sells similar frames.
You can calculate optimal prices with spreadsheets easily.
Example:

Your company is a drogerie retail chain with an online store. It operates in 100+ cities and has 10,000 SKUs in the assortment range. Competitor lists, their assortment ranges and their prices vary greatly among locations. KVIs lists, cost prices, costs, logistics differ based on location.
With poor automation, such as "spreadsheet level", your prices wouldn't be optimal. Your company would lose a part of profits, and it would be hard to retain customers' loyalty.
Further we will focus on rule-based dynamic pricing approaches for retail companies.
2

## What Do Retailers Achieve With Automated Pricing Rules?

Utilizing automated pricing rules (also called rule-based dynamic pricing), mature retailers set more optimal prices, and as a result, they increase sales volume and profits and decrease direct losses.

Let's explore the most popular types of automated pricing rules.

### 1) Pricing Rules For Price Segmentation

Retailers utilize this type of pricing rules to calculate individual prices for a specific customer segment.

Special prices for each customer segment are highly relevant for:
• For companies with a natural customer segmentation.
Examples:
individuals and companies,
wholesale small and large quantities buyers,
customers with a loyalty card and customers without a card,
customers with loyalty cards of different levels,
customers who have paid a certain amount within a period.
• For companies whose clients have different price preferences.
That is, some customers buy mainly expensive goods, while other customers prefer economical brands.

• For companies selling highly competitive products with manufacturer's price restrictions: recommended retail price (RRP), MAP (minimum advertised price).
• For companies whose strategy includes promoting a mobile application or increasing the number of purchases through a personal account on the website.

Example.
A hypermarket chain analysed clients data and discovered a segment of consumers with high-quality expensive products preferences.

The company launched a new loyalty program for this segment, offering to such clients good deals about top-branded olive oil, salami, cheese, truffles, vine, caviar, etcetera. The chain provided these offers via email and mobile app. To get the special price, customers had to use loyalty cards at a cash-desk.
Example.
An online store of garden machinery has launched dynamic personal pricing in customers' personal accounts, named "Secret Prices With A Promo Code".

The website displayed the regular price, so competitors couldn't be informed about the "Secret Low Prices", and the promo action didn't create a danger of a "price war". Clients saw personal special offers only in their personal account, after entering the promo code from the invitation email.

A dynamic pricing solution was recalculating "Secret Special Prices" fully automatically, according to complex and agile pricing rules set by the store pricing experts.
For example, when inventory of a product ran out and the store got a higher-cost batch of goods, the "Secret Price" was recalculated based on the new cost of goods, to prevent the company's losses.
If the new price no longer looked attractive compared to the competitors, then the dynamic pricing solution automatically removed the SKU from the "Secret Sale". That was preventing conflicts with customers: "You offer me a regular price, not a special one! You are trying to charge me high by pretending it's a sale."

### 2) Competitive Pricing Rules

Retailers utilize this type of pricing rules to maintain their target price position at the market.

How it works in a retail company:
The retailer's team identifies key competitors in each market and determines the pricing strategy for those markets.
The team launches an automated or semi-automated gathering of competitors' prices.
A pricing specialist enters pricing rules into the dynamic pricing system.
When the key competitors change their prices, the system automatically adjusts the retailer's prices, according to set price positioning at the market.
Key competitors are retailers whose price changes have a significant impact on your store sales.

Analysing data with machine learning algorithms, modern dynamic pricing engine is able to automatically identify key competitors for each SKU. You can find more information about such algorithms here: Key Competitors Automatic Identification.
Example.
In a city A, for certain SKUs, a retailer wants to maintain the second-lowest price, compared with the retailer's local key competitors. If these competitors change prices, the retailer's price has to adjust in order to become the second-lowest price again.

Commonly, the competitive approach provides instant results, such as gross profit increasing and sales growth. Often competitive pricing impacts the growth of sales in the first days after implementation.
CASE STUDY
Competitive Pricing Rules
Leading optical retailer increased sales by 32% utilizing competitive pricing rules.
Efficient rule-based competitive pricing doesn't require sophisticated algorithms, but agility of settings is crucial.
In reality, any retail / ecommerce business operates with quite complicated pricing scenarios; you can study a few common examples of such scenarios here: COMPETITIVE PRICING SCENARIOS.
And here is an example of a dynamic pricing solution with high agility of settings: COMPETITIVE PRICING SOLUTION.

### 3) Zone Pricing Rules

You might notice from the chapter above, that competitive pricing rules can be set for a particular location (zone).

Zone Pricing is a pricing method that takes each location as a different market with a tailored pricing strategy.
Such a strategy considers in pricing rules the location's unique characteristics:
• Consumer demand patterns.
• Competitive environment and competitors' pricing behavior.
• The retailer's objectives in that location, such as market share raising or profit maximization.
• Inventory turnover, stocks in local warehouses, costs, supply dates, suppliers conditions.
• List of suppliers, different scenarios of supplier choosing, various methods and formulas for costs calculation.
• Items' roles in the consumers' basket, such as KVIs and profit drivers.
As locations, we can take different cities, towns, city districts, parts of the country, countries.

Utilizing an efficient localized pricing strategy, a retailer / an ecommerce shop can significantly increase sales and profits, considering in local pricing rules the unique characteristics of local demand, supply, competition, and logistics of each SKU in each particular location.
Example.
An online store of garden machinery had a warehouse only in a headquarters city, but delivered goods within a lot of geographic areas. The retailer began offering discounts to living far away customers, to compete more efficiently with their local stores. As a result, regional sales increased to 70% of total sales.
You can find more information about how to launch Dynamic Zone Pricing and how it works here: ZONE PRICING.
CASE STUDY
Zone Pricing Rules
Leading optical retailer increased sales by 32% utilizing zone pricing rules.

### 4) Pricing Rules For KVIs

KVIs (Key Value Indicators / Items) is a group of goods, which can perform several essential functions for a store at once:
• 1
Shape consumers' price perception:
Shoppers tend to notice, compare and remember KVIs prices.
By KVIs prices a consumer determines a price category of a store, such as "unfair expensive" or "they provide great prices here."
• 2
Affect consumers' assortment perception:
Finding or not finding KVIs in a store, a shopper determines the shop as "This is the right place, everything I need I usually find here" or
"There is always only half of the goods I need here; I'll visit this store last."
• 3
Drive traffic to store:
With the optimal price, KVI attracts new customers and increases conversion to purchase.
How should a retailer manage KVIs?
• Step 1. Identify all KVIs in the store's assortment.
• Step 2. Calculate the optimal price position of each KVI compared to competitors. For certain KVIs, only the first-lowest price is optimal. For others, the second-lowest price, or even third, forth or fifth position, could be more efficient in terms of sales and profits.
• Step 3. Maintain KVIs' prices at the optimal level, utilizing pricing rules for KVIs.
• Step 4. Run pricing experiments to recover margin. Try to raise prices of SKUs that have the following characteristics:
– Price varying of these goods is not crucial in determining to buy or not and where to buy.
– Consumers are poorly aware of the market price of these SKUs and their substitutes.
Complementary goods and impulse goods often have the potential to raise the margin.
Today the list of KVIs is no more static, like it was 10 years before, and could change significantly in one week or even in one day. Due to the increased complexity of KVI Pricing, ecommerce companies and retailers have begun to invest in dynamic-pricing solutions.
How can dynamic pricing platform help in price efficiently KVIs:
• Rule-based competitive dynamic KVI Pricing.
• AI-driven automatic KVIs Identification.
• AI-driven calculation of the optimal competitive price position for each KVI.
• AI-driven Key Competitors automatic identification.
• AI-driven automatic identification of SKUs, which prices can be raised to recover the retailer's margin.
CASE STUDY
KVI Pricing RULES
Supermarket chain added value to consumers and increased profits with KVI pricing rules

### 5) Pricing Rules With ML-Based Algorithms

ML is an abbreviation of Machine Learning.
Modern pricing solutions have Machine Learning-based price optimization modules.
ML-algorithms for price optimization calculate a set of prices that maximize a selected criterion: gross profit, revenue, or sales volume in pieces at the assortment-level.

ML-algorithms find the optimal set of prices under current conditions. "Optimal" means, implementing that price configuration, a retail company achieves the maximum gross profit, revenue, or sales volume at the assortment level. Machine learning algorithms evaluate goods' cross-impact and segment items by their roles in the consumers' basket: basket drivers, traffic drivers, profit drivers, complementary goods, substitutes, and others. Then each segment gets its optimal pricing strategy according to your business goals.
Such a solution could also allow you to optimize the prices of a specific category of goods and rapidly find optimal prices for new items.

To run such algorithms, a pricing specialist has to set up special pricing rules:
• Select an optimization criterion, which could be gross profit, revenue, or sales volume in pieces.
• Set a price range permitted.
Then the ML-Based Algorithms begin the demand sensing. Within the set price range, algorithms start to raise and reduce prices, evaluating how it affected sales. Machine Learning tool solves the Exploration–Exploitation Dilemma: to find the best price as soon as possible and exploit it as long as possible.
CASE STUDY
Pricing Rules With AI-driven Price Optimization
Leading eBook retailer hits +8% growth in revenue, utilizing pricing rules with ML-based algorithms
CASE STUDY
Pricing Rules With AI-Driven Algorithms
Artificial Intelligence calculated optimal prices for an e-Commerce company, increased gross profit by 20.1%, and reignited demand.
CASE STUDY
Demand-Based Dynamic Pricing Rules
Hypermarket chain automates pricing by leveraging artificial intelligence to stay on top of competition.

### 6) Pricing Rules Based On Inventory Turnover

The approach is essential for stores which have a wide assortment with a low turnover ratio and overstocking.
In a relatively short time, pricing rules based on inventory turnover helps reduce excess stock, remove unpopular items from the assortment, free up the capital for new items, while maintaining marginality as much as possible.
Example.
The retail company analysed its inventory balance and detected excess stock.

To get rid of overstocks, one store ran a "total sale", with discounts of 70% of the primary cost.

In another store, they implemented several gradations of discounts, depending on the period the item was in stock.
This store sold 85% of the items with discounts of 20%, 30% and 50%. They had to sell only the remaining 15% of the goods at the maximum discount of 70%.

Thus, the first store lost profit on 85% of the items.
Also, dynamic pricing solutions allow retailers to reduce the risk of overstocking. Analytics tools help to track inventory and identify the list of SKUs not recommended for reordering in the future.

You can find an example of dynamic pricing solution with Inventory Turnover Module here: DYNAMIC PRICING PLATFORM.

### 7) Stock-Based Pricing Rules

Some internet stores and retail chains ship goods to consumers straight from suppliers' warehouses. Sometimes a few suppliers offer the same item, at the same or at a different price.
This type of partnership provides a lot of advantages and benefits, but there are some difficulties also.

If the items are available from several suppliers, it can be difficult to quickly choose the optimal under current conditions shipment warehouse.
When the product stocks of one supplier are over, and the store starts to ship from another supplier's warehouse, prices of the first and second suppliers can differ. If the second supplier price is higher, and the store remains its prices for consumers unchanged, it can significantly reduce the margin, up to selling at a loss, especially during promotional offers.
How Stock-Based Dynamic Pricing Rules work:
• The pricing solution automatically updates data on inventory balances, receiving information from your ERP system.
• Pricing solution predicts how many days the stock will last.
• When the inventory balance is equal to the set value, or when the warehouse is changed, the solution automatically raises or lowers the price to the optimal level, according to set pricing rules and restrictions, and then automatically uploads the new price to the retailer's ERP and to the website.

The criterion of the optimum depends on set goals, for example:
remain the assortment until the next arrival,
maximize profits,
prevent a critical decrease in margin or sales at a loss.
You can find an example of dynamic pricing solution with Stock-based pricing rules here: DYNAMIC PRICING PLATFORM.

### 8) Time-Based Pricing Rules

What is Time Pricing:
A retail company identifies periods when short-term price adjustment sufficiently increases the company's sales or profits and efficiently exploits such opportunities.

The most common types of time pricing as follow:
• Markdowns, sales, promotions, Black Fridays.
• Agreements with suppliers with specific time limits.
• Bypassing suppliers' price restrictions.
• Night prices. For example, from 23.00 to 6.00, prices automatically increase and at 6.00 switch back to regular prices.
• Weekend prices.
• Prices for a surge demand time.
• Prices for a major city event period.
You can find more information about how to utilize time-based pricing rules and how these rules empower retailers to increase their profits here: DYNAMIC TIME PRICING.
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