How to use your inventory data for pricing strategies

With aggressive sales and discounting tactics being practiced in all competitive industries, understanding how to get the most from your inventory data is a foundational part of building successful pricing strategies.

In today’s market, there’s no room for the faint of heart. If you aren’t keeping your finger on the pulse of all the different nuances in the business world, chances are you’ll be swallowed right up by someone who is.

One of the most crucial parts of appealing to certain demographics and competing in economies of scale is making sure your value proposition is as clear as day.

To help you better express value through pricing, this article covers the following topic areas:

  1. The basics of inventory management software
  2. Pricing strategies according to the law
  3. Key metrics to use in data-driven pricing strategies
  4. Maintaining pricing integrity while offering discounts

Normally, a good value proposition is balanced with a clear mission statement, a significant value-add and a competitive pricing strategy.

As seen from the collapse of PurpleBricks Australia last month, the definition of a ‘competitive pricing strategy’ can vary based on factors like the industry, geographic jurisdiction and target market where the product or service is being offered.

But before getting started, for those selling physical inventory, the first thing you’ll need is accurate inventory data, and that requires a good inventory management software.

What is inventory management software?

Inventory management software is designed for tracking every facet of stock control. Things like inventory volume, orders, sales and deliveries should all be updated in real-time (or very close to it).

As a result, inventory management software can be used to automate many elements of your supply and sales processes, such as reordering, pick and pack, online sales, asset tracking and much more.

Inventory management software should also seamlessly integrate with other business-critical software, such as your online accounting software and customer relationship management (CRM) systems.

If your business warehouses and sells product internationally, then you’ll also want to make certain that your inventory management software includes features such as multicurrency and multilocation inventory.

READ: 7 steps to a successful stocktake

Best practice guidelines for setting prices

While the guidelines of creating a healthy value proposition are indeed quite specific, there are generic principles to derive pricing models that SMEs can use, which are likely to help keep their value proposition in good shape.

These principles remain the same whether you’re in service or retail, both online and offline.


1. Be creative, but play according to the rules


Just like all elements of business these days, pricing models need to be innovative. Offering promotions, discounts, and other value packs are all a crucial part of customer acquisition.

To remain innovative, business owners need to stay ahead of the curve and think of creative (and often aggressive) ways to execute tactics that will win over their prospective customers from a pricing standpoint.

This can be achieved with a thorough understanding of inventory data, market research and competitor analysis to find a ‘sweet spot’ in pricing that works for you.

That said, each country is likely to have its own set of rules when it comes to competitive and fair business practices. Sometimes, founders can get so caught up in the excitement of growing a business that the boundaries that separate fair competition and ‘foul-play’ can begin to blur.

Just last week, Australia’s online retail giant Kogan.com was sued by the Australian Competition and Consumer Commission (ACCC) for allegedly raising prices right before introducing a discount, a concept referred to more commonly as ‘jacking up prices’.

While Kogan.com fiercely denied these allegations, this series of events should act as a sobering reminder of the dangers associated with being too aggressive with pricing strategies.

Being creative, innovative and aggressive in your tactics will always be an important element of remaining competitive. However, if you want to remain in business altogether, always be conscious of the rules of sales and promotions and keep a fair distance from the borders of ethical dilemmas.

If you’d like to know more about the law regarding pricing tactics in Australia, the ACCC website is the place to start. If you’re operating in New Zealand, you’ll find those details on the Commerce Commission’s website.


2. Data-driven pricing metrics


There is an art to offering good discounts, promotions and deals, and there are several Australian companies that have proven to master that art.

An example of such a company is Luxury Escapes – an Australian e-commerce company that offers high quality luxurious holidays at heavily discounted prices.

According to Adam Schwab, Co-founder of Luxury Escapes, there are several data-based metrics that can be used to measure whether or not your existing pricing strategy is of a high quality.

“Ultimately, conversion and ROAS (return on advertising spend) are the two most critical metrics that indicate the quality of a pricing model,” Schwab said.

Schwab also explained that looking at the “delta on the first purchase” between “cost of acquisition and incremental margin” is another strong indication as to whether your pricing model fits the market.

Basically, if your profits increase once your customers have returned and no longer carry an acquisition cost, you’re positioning your prices nicely.


3. Discount while maintaining price integrity


There are two ways to ensure that your business generates significant sales.

The first (and by far the least glamorous) would be making sure that your product or service is the cheapest on the market. Such a tactic will almost always be desirable to people when comparing two competitors.

The second is by carefully balancing all the important elements of a solid value proposition, a much deeper and long-lasting business strategy.

READ: Why pricing is still the most effective marketing tool

Part of developing a high-quality value proposition is by maintaining the integrity of your prices, even if they are discounted from time to time.

In other words, there are certainly appropriate times to offer discounts and promotions but pushing one’s way to the front by further discounting the product is normally a sign that the pricing model lacks integrity – a red flag for business viability.

When asked how small businesses can achieve this, Schwab explained that it all comes down do how compelling the company’s value proposition is.

“At Luxury Escapes, our product is a discounted product compared to competitors,” Schwab told The Pulse, “and we tend to operate a high volume/low margin model.”

We wouldn’t offer ‘discount on discount’ as we have such a strong product and such strong customer engagement that we wouldn’t want or need to go down that path.”

While Schwab’s business is purely online, he also pointed out that some of the great global retailers of physical inventory (like Wal-Mart and Costco) as well as Australian retail giants (like Kmart and Aldi) don’t usually “discount above their existing model”.

 

A good inventory management tool is your starting point for accurate stock control, better margins and more money in your pocket. MYOB AccountRight offers all this and more, right from your online accounting software. Sign up for a FREE 30-day trial now.

 

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