What is Cost optimization? How can AI help DTC eCommerce businesses during price optimization?
Jan 22, 2022
10 min read
Let me ask you a question: What can you do to make your company grow? It’s a tough one. It is certainly not a cakewalk. Some people would say that using advanced marketing tactics can be the best solution. Others might recommend focusing on customer engagement.
All these approaches have their significance; however, the first thing that grabs your customers’ attention is the product’s price. And there is a reason for this firm statement. According to a research report by Deloitte, the price matters the most to the consumers.
But why are we talking about the customers when the question is about the company’s growth? Because it’s the customers that play the most crucial role in a business’s overall productivity. If the customers don’t buy your products, it doesn’t matter how exciting or beneficial your product is; neither growth nor revenue will generate.
So, that brings us to an essential point of discussion: cost optimization. It doesn’t mean shifting the focus from customer experience or improvising your marketing skills; you must consider them too. However, since 60% of online consumers choose an online seller based on pricing, you can view it as your starting point.
Now, the question is, how to optimize your costing? Artificial Intelligence is one way to maintain the balance between customer satisfaction and keeping profit margins. It ultimately helps your pricing managers to deal with product marketing, selling, and costing while keeping revenue maximization in mind. Let’s learn about cost optimization and the role of AI in optimizing the prices for DTC businesses in detail.
What’s Cost Optimization?
According to Gartner, “Cost optimization is a business-focused, continuous discipline to drive spending and cost reduction while maximizing business value.”
In simple words, it is a process that requires a detailed and comprehensive plan of action to manage the prices of products and drive business value, keeping in mind the company’s business model.
Cost optimization can help you in:
- Improving management performance and business efficiency
- Reducing business operations cost
- Setting competitive prices for your products and services
- Enhancing the brand’s market value
- Satisfying customers’ needs and demands
Why is Cost Optimization Important for Your DTC eCommerce Business?
As already discussed, price is the most influential factor that helps the customers for DTC eCommerce to decide to purchase something or not. It is followed by free shipping and discounts. However, all three of them are somewhat related to cost. Although a personalized experience and sterling customer service have been added to their areas of interest, the product’s price is still the top priority.
You need to understand that your pricing strategy defines how you interact with your customers. However, it would be wrong to consider cost optimization as lowering the price of your products. Your product’s cost can also determine its perceived value. For instance, lower prices attract shoppers into your eCommerce store, but too low prices might give them an impression of poor product quality.
Therefore, your cost optimization strategies must align with your business objectives, market positioning, and targeted customers’ expectations.
The Role of AI in Cost Optimization
Let’s say you are good with figures and have a good sense of marketing. You can set optimal prices for some of your products that neither disappoint your customers nor affect your marginal profits negatively. That seems smooth, right?
Now, suppose your eCommerce business grows, and you no longer deal in just dozens of products but thousands of items belonging to different categories. In that case, you or your price managers need to possess supernatural abilities and high-tech analytical & computational powers to decide the optimal price range for each product almost every day. That would be a mind-boggling situation.
This is when equipping your systems with AI and machine learning can be the perfect solution for you. With AI, you can use self-learning algorithms to scan massive amounts of data, walk through multiple costing scenarios and get the most relevant price agreeable for everyone. You can easily save time by automating all the tasks and focusing more on customer-centric areas. According to IBM, 79% of online retailers had planned to use AI for customer intelligence by 2021.
How Can AI Prove to Be Effective in Cost Optimization?
AI algorithm-powered business models analyze hidden relationships between products, prices, focusing, and sales to derive the best optimal solution to generate maximum profits. Here are the ways to understand how effective AI can be in cost optimization and online retail marketing:
Providing Suggestions Regarding Optimal Prices
There is a reason when someone says a price value is optimal, and that is it neither wards off shoppers, nor it affects the profits. Moreover, it also ensures that the price of one product does not influence the sales of other items sold by a retailer.
eCommerce businesses that use AI-driven cost optimization solutions know to put ideal cost with the help of stock-keeping unit (SKU), marketing channel, point of sale, product portfolio, and obviously, customers. If the optimal pricing is adequately done at all these levels, it will ultimately lead to profitability.
Choosing Products for Pricing Becomes Simple
Some niche products distinguish you from others that you can sell at higher prices, such as private label items, medical products, etc. With AI, you can check and pick those items and sell them without lowering their costs. Take the example of a baby cough syrup. Customers might look for enticing offers on major products, but there are some things in which they prefer quality, assurance, and authenticity before prices. While buying a baby syrup or other baby product, they will generally consider an online store specializing in such items. In such cases, AI can help you recommend specific products and their prices suitable enough to attract them while maximizing profits.
Assisting With Different Price Points
One of the best things about AI and machine learning is their accurate prediction capabilities. ML algorithms can analyze consumer behavior and data to create and test different strategies and price points. As a result, online retailers can leverage this ML data and have more than one possible product price. With this, you can have several cases providing the optimal price for profit maximization.
Picking the Right Price Strategy for Your Business
As already mentioned above, AI and ML algorithms offer online retailers room to perform experiments with their price and promotion strategies. With AI’s forecasting capabilities, they can predict shoppers’ reactions to their pricing strategies and choose the best one that creates maximum customer engagement and profit. It will also help them be one step ahead of their competitors in cost optimization.
Acquiring Insights for Personalized Costing
AI-driven solutions focus not only on the records and buying patterns of the customers but also on other factors such as sales patterns, demand & supply of a product, weekends, holidays, weather, current trends, and much more. Based on these, it analyzes and picks the right products with the best-suitable prices that are popular and in-demand on social media. Furthermore, it also keeps an eye on the interests and preferences of individual shoppers to recommend them with the most personalized price offers.
Wrapping Up
The competition in the eCommerce space is blazing up day by day. You lose one opportunity, and you might see yourself behind your competitors. AI-driven solutions are one such opportunity, and every business owner, especially eCommerce retailers, is looking forward to grabbing it.
This is high time, and you need to understand that consumers always look for the best options. When pricing is the priority, they can quickly shift towards the one with the best offers. So, why not optimize your products’ cost and become a choice, not an option for your customers? Therefore, to make this dream a reality, pick a proficient digital marketing company that knows how to bring the best use of AI for your business.
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