This is a guest blog post by Wiser a Demandware Certified Partner

Let’s be honest. Implementing a new pricing strategy is scary. Raise prices, and you may drive buyers away. Lower prices, and you may impact your profit margins. Whether you choose to raise or lower prices, the key ingredient is elasticity.

As noted in this article, Amazon changes prices millions of times a day, and its ability to be resolutely efficient at price competitiveness plays a big part in its success.

There’s no one pricing strategy for all retailers. Overall, when and how to transition to a new pricing strategy depends on competitor pricing, your price position, and elasticity of demand. Specifically:

Competitor pricing

Your prices are constantly compared to your competition because online shopping is an inherently transparent activity. (Consider the myriad price comparison-shopping engines, websites and apps.) Your success depends on your ability to present a superior value proposition, whether that’s exceptional customer service, assortment, seamless returns or free shipping. It’s imperative to benchmark against competitors to ensure you’ll stand a chance in the fight for sales.

Knowing how competitive you are on a granular level is helpful, but sometimes a bird’s eye view provides more insight into how your strategy compares. Wiser’s Market Price Index (MPI) is one metric that delivers this insight. It takes into account all the products you have in common with a particular competitor and weighs your prices against theirs. For example, if your prices are equal, you will have a score of 1. If your prices are 15% lower, you will have a score of 0.85 and if you’re 3% above, you’ll have a score of 1.03.

MPI can also be broken down by category to measure competitiveness on a certain subset of products. If you’re priced higher than most competitors, you’ll need to justify those prices with added value. If your prices are significantly lower, it might be time to raise them to regain profit you’ve been leaving on the table.

How you are priced vs. competitors should impact your pricing on your main categories. For example, Amazon is better known for its electronics selection and competitive pricing than, say, car parts. Therefore, if your business is car parts, it’s important to be more competitive and use secondary categories as cross-sells with higher prices to make up lost profit margins.

Elasticity and demand estimation

Price tests are key because they quantify the effectiveness of a pricing strategy. The outcome indicates a product’s price elasticity, which helps estimate demand. If you raise prices and don’t see an impact on sales, that indicates the products are inelastic. These are the products that you have pricing power on and can be used to improve your profit margins. However, if you drop prices and notice that shoppers can’t get enough of it, then you’ve got yourself an elastic product.

Based on price test data, you get a good idea of how price changes impact demand. When you find a price that increases sales and also brings in positive margins, you’ve found the best price. But that best price doesn’t last for long. Keep testing your prices to see just how optimal your pricing can become over time. Price testing involves trying a new pricing strategy on select items and monitoring the traffic and sales impact. If it is favorable, roll it out to more items and eventually site and/or store wide.

Retailers shouldn’t fear new pricing strategies, because they can be used strategically in ways they never thought possible. Dropping prices is often necessary, but understanding the price elasticity for key products helps retailers optimize their prices for profit and revenue gains. Lowering prices to be more competitive can help win sales, while raising prices to capitalize on a competitor’s depleted inventory, are all strategic weapons in the battle for consumer dollars.