New online shopping agents, demanding consumers, and the reality of inconsistent pricing over the Internet are shrinking retail margins and diminishing the likelihood of profitability. According to a new Report from Forrester Research, Inc. (Nasdaq: FORR), retailers that adopt personalized pricing — the delivery of customized offers to consumers — will regain their equilibrium and restore margins.
“The bottom line for online pricing: Retailers are at the mercy of online consumers,” said Carrie A. Johnson, associate analyst at Forrester Research. “Online shoppers, empowered by technology and information, pit merchants against each other — demanding the lowest price possible. After all, other merchants’ prices are just clicks away.”
Pressure on retailers will be alleviated through personalized pricing, which Forrester defines as the delivery of prices to customers based on familiarity with a customer’s buying behavior and price sensitivity. Retailers will set prices based on knowledge of a customer’s propensity to part with three online currencies: data, time, and money.
Creating a personalized pricing strategy begins with the identification of customer buying behavior, which falls into three general shopping scenarios: Price grabbers want bargains and are willing to comparison-shop until deals are found; express shoppers want hassle-free buying and ignore prices in exchange for convenience; price and convenience take a back seat with affinity buyers, whose buying decisions revolve around lifestyle.
Once retailers have identified general shopping behavior, they must then map the right offer to the most receptive customer. By observing consumer on-site behavior and targeting appropriately, retailers will maximize sales to shoppers visiting their site. Companies will partner to integrate product, price, and promotion databases to identify and cater to their precise customer base. Monitoring competitor pricing will also help retailers figure out if their offers match demand and target customers accordingly.
Successful retailers will make sure that the right offer for the right customer is accepted by offering personalized customer service. Retailers will push low prices to bargain hunters without the clutter of competitor discounts and promotions. Express shoppers will be won over if the overall value proposition is clearly exposed, allowing retailers to charge premium prices. The secret to coaxing affinity shoppers through the buying cycle lies in enabling them to find an offer that meets their specified needs.
“Personalized pricing will improve margins by only making rock-bottom prices available to customers who wouldn’t otherwise buy and increases margins on items targeted at less price-focused shoppers. Good overall value, which includes more than the price of goods sold, helps build customer loyalty,” added Johnson. “Ad budgets and merchandising resources will decrease as retailers advertise and serve up specific prices to specific groups of consumers.”
For the Report “Pricing Gets Personal,” Forrester interviewed 30 online retailers, as well as industry experts and members of academia, to assess the impact of online price pressure. Fifty-seven percent of retailers surveyed plan to offer multiple prices for the same item, and 71% of that group expects that strategy to take the form of preferred pricing for regular customers.