Data-driven marketing has enormous advantages over traditional marketing strategies. For example, it enables segmentation and allows marketers to customize and personalize messaging for the customer profile of each segment. It also makes it easy to track what messaging is working and to modify and optimize campaigns in real-time. Messaging isn’t the only area in which data-driven marketing can be very valuable. It’s also a key tool in one of the most critical components of any strong marketing plan — pricing strategy.
Pricing strategy is complex and incorporates a variety of factors including competitor analysis, production costs, consumer demand, industry needs, and profit margins. In recent years, it’s become even more challenging since digital tools enable price transparency across channels. Although this trend is great for consumers and gives them a lot of power, it makes the competition more fierce for retailers. It even influences brick and mortar stores since consumers can price check on their phones while in the store.
The only way for retailers and sellers to remain competitive is by using data-driven marketing to build their pricing strategy. Let’s examine how robust data can help determine price elasticity and support a consumer-focused price strategy.
Price Elasticity of Demand
One of the first things to consider when building a pricing strategy is the price elasticity of demand. This economic term basically refers to how much the demand for a product is influenced by fluctuations in its price. For example, fuel is considered to be fairly inelastic in terms of pricing — people need to get to work so they buy gas even when the price is high. Leisure activities like movie tickets and restaurants tend to be more elastic — when the price goes up, some consumers opt-out and don’t buy the product.
The best way to judge the price elasticity of demand for a given product or service is with data-driven analytics. Sellers can use data to track the impact of pricing fluctuations on the demand for their product. Data can help them determine the threshold past which demand begins to drop.
Choosing the Right Pricing Strategy
Once a business has determined the elasticity of demand for its products, the next step is to consider the various pricing strategies. Traditionally, competition-based and cost-plus pricing are the most common pricing strategies.
A competition-based pricing strategy is looking at what competitors charge for the same or similar products or services and charging approximately the same amount. A cost-plus pricing strategy involves calculating the costs of producing a product or service and adding a markup to reach the consumer price. Both of these pricing strategies are straightforward and simple. Unfortunately, they don’t relate to the needs or desires of the consumer, the most important variable of the pricing equation.
Many brands have now moved to one of several consumer-focused pricing strategies, detailed below. Each of these pricing strategies needs to be supported by a data-driven marketing approach in order to be successful.
Freemium pricing strategy
Freemium pricing is extremely popular in the digital world. The basic concept is to offer a free, bare-bones version of a product to entice customers to give it a try. Once the customer is hooked on a basic version of a product or service, the company can encourage them to upgrade to a more advanced and robust version at a cost.
Data-driven marketing is critical to freemium pricing strategy. For example, it allows companies to track consumers who visit the purchase page several times but don’t convert to the upgraded version. Companies can then encourage those customers with special offers or content that explains additional product benefits that come with paid plans. Likewise, they can characterize the groups that convert to paid versions more easily and invest more in advertising to those visitor segments.
Penetration pricing strategy
A penetration model introduces a product at a very low price to create buzz and excitement and then raises the price over time. It’s great for both new markets (think Netflix at the beginning) or to help a new seller break into an existing, established market. Unfortunately, since it often involves selling under cost, it isn’t sustainable over the long-term and companies are quickly forced to raise prices.
A data-driven marketing approach can help companies experiment with pricing options to see how low they need to price the product in order to penetrate the market. They can try advertising campaigns using different prices to determine the optimal price for penetration without going needlessly low. It can also help them determine the right amount and intervals at which to raise prices so as not to lose customers.
Dynamic pricing strategy
In the dynamic pricing strategy — which is common among hotels, airlines, and event venues — prices change constantly due to fluctuations in the market, competitor activity, and individual product supply and demand. Prices can also fluctuate for individual consumers at different parts of the browsing and consideration journey.
The dynamic pricing strategy is only possible when using a data-driven approach. The right data and information make it possible for e-commerce retailers and sellers to set optimal product prices and stay both competitive and profitable, despite price fluctuations.
Value-based pricing strategy
This strategy determines the price of a given product according to what the customer is willing to pay. For example, health-conscious customers may be willing to shell out a lot more for a superfood than other customers who perceive less value in the product, even if a cheaper version is available to them. Value-based pricing can increase profits significantly. However, in order for it to be effective, companies need to build customer personas and identify what it is that their potential consumers actually value. They can then utilize data-driven marketing to emphasize the value to the relevant customer and determine how much the customer is willing to pay for it.
There’s no single “right” pricing strategy — it really depends on the type of business, available resources, competitors, and other market factors. Data-driven marketing has enabled retailers and sellers to adapt to the challenges of today’s market and remain profitable and competitive by adopting dynamic, advanced consumer-focused pricing strategies.
Laura Smous is the Senior Director of Product Marketing at AdRoll.