Through a special arrangement, what follows is a summary of an article from Retail Paradox, RSR Research's weekly analysis on emerging issues facing retailers, presented here for discussion.
Dynamic pricing seems to be a popular buzzword these days.
My take: at least half the hype comes from a misplaced definition of what dynamic pricing actually is. The problem comes from confusing dynamic pricing with "personalized" pricing.
What Amazon does — change prices multiple times during the day (although the number of items receiving this treatment is still pretty small) — is "dynamic" pricing, but it is in no way personalized. It's just a lot of price changes happening during a short time period - and someone who might have paid the higher price benefits just as much as someone only willing to pay less.
At best, dynamic pricing may evolve to sophisticated approaches that detect whether a competitor has made a significant price change or is facing an understock, and also whether your own conversion rate on the product in question is taking a related hit.
Personalized pricing is different — and requires more complex analytics to pull off. For example, at Jet.com, depending on what you add to your cart, each item gets repriced right in front of you. There is "the" price, and there is "your" price. Repricing might depend on the deals Jet.com has with suppliers, the supply chain efficiencies of the items you've selected, or your shopping behavior, whether that is localized behavior, like adding something to your cart and then not buying it; or behavior over time, like offering discounts to high value shoppers to expand the categories they shop.
As long as those offers can be rationalized to avoid accusations of bias, variable prices can be explained by showing how "your" price was calculated versus "the" price.
I think personalized pricing is the future, and that requires a lot more capability than simply changing prices many times over the course of the day. Dynamic pricing, the definition in use today, is just a fad, and will ultimately be out-gamed, whether by competitors, or by consumers themselves.