This is a summary of Brecker's full post on HiConversion: take a read to learn even more about pricing optimization.
The prices your customers care about are the prices they see. Not only do customers not care about the costs of production or shipping; they don’t have the information necessary to even make those considerations.
Price optimization is the process of finding the most optimal price for a product that will yield the best results. Behavioral price optimization is a type of price optimization that utilizes merchants' on-site sales data to analyze consumer behavior (more on this later).
It is an important practice for eCommerce brands because we do not live in a static world. Everything in our world is in a constant state of change and this includes people's wants, needs, tastes, preferences and budgets. The world is always changing and evolving and this includes the Internet. Digital ads are becoming increasingly competitive and customer acquisition costs are rising, necessitating the need for higher conversion rates and customer lifetime values to balance them out. Merchants must be able to detect trends in the changing environment as they begin to occur so that they can capitalize on them to the fullest extent.
How does pricing optimization work?
Pricing optimization starts by gathering data on each product's historical sales volumes, list and sale prices, and preponderance of promotional codes. Leading vendors seamlessly integrate with your historical data and analyze this data to discern the controllable effects of price changes and discounts from the uncontrollable effects of trends and seasonality. Leading vendors use machine learning to analyze your data and provide insights on what you should be doing and when. These vendors calculate goal-achieving prices based on desired mix of profit margins and sales volumes. The best vendors offer comprehensive software that handles the process behind the scenes for you, enabling you to easily make informed decisions on pricing. Pricing optimization can be a complex process but with the right combination of behavioral analysis and automation it can also turn out to be surprisingly easy.
Is pricing optimization different from price testing?
Pricing optimization is different from a/b price testing. A/B price testing is trial and error process that requires a lot of data, time, and careful analysis to cut through the noise. A/B price testing is not behavioral price optimization. The primary goal of behavioral price optimization is to analyze and interpret consumer behavior so you can discover optimal prices quickly and accurately without needing to actively test prices.
Is pricing optimization different from price matching?
Price matching is also different from pricing optimization. There are many merchants that think they need to obsessively monitor competitors' prices in order to satisfy their customers who are price sensitive. Here's the thing: if your prices aren't competitive enough, your customers will tell you through their behavior. You cannot truly "price match" against a unique brand with unique products because unique brands have unique opportunities when it comes to formulating their own pricing strategies. Customers don't have access to any of that information so they don't care about it, but they do care about what they see on screen.