Has dynamic pricing hit a rut?

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Aug 01, 2019
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Ben Unglesbee

Through a special arrangement, what follows is a summary of an article from Retail Dive, a publication providing new and exclusive insights to retail executives and decision makers.

Dynamic pricing — used to match prices in real-time with supply, demand and competitors — hasn’t hit the store level in any significant way, at least in the U.S. Online, dynamic pricing is common, if still not fully embraced or understood by retailers writ large.

One of the main reasons dynamic pricing isn’t more broadly used is that it is incredibly complicated to execute.

In its most advanced form, retailers don’t simply check their prices against competitors per item. “You also compare category to category, you compare common baskets to common baskets,” said Julien Gautier, marketing director of analytics firm ActiveViam. “But after that, you also have a strategy that involves your own brand. So you want places to be consistent with the brand image that you project.”

Dynamic pricing further involves knowing who your competitors are, what other products compete with a particular item, how loyal your customers are and so on.

The complexity requires large investments by retailers, often in new technology that may include adding digital price tags across stores as well as highly skilled workers (who would probably rather be working for a Silicon Valley company). 

Shifting to the practice requires pricing managers to change how they’ve done things for decades, essentially handing over pricing control to algorithms that can make instantaneous decisions. Consumers may feel alienated as prices change regularly, potentially increasing in times of high demand.

The challenge the dynamic pricing seeks to address is partly that retailers don’t know exactly what’s on store shelves or how old it is, a problem that new technology could address, according to Robert Evan Sanders, an assistant professor of marketing at the University of California, San Diego. “The fixed costs of implementing dynamic pricing have to be pretty large for retailers to rationally not do this,” he said. 

Even putting those issues aside, retailers typically have uniform prices across their chains, Prof. Sanders noted. Beyond immediate supply and demand factors, retailers also aren’t pricing against broad, long-term regional economic differences. 

But Prof. Sanders thinks change is coming to the industry. “Just given my calculations, they’re leaving money on the table,” he said. 

DISCUSSION QUESTIONS: Do you see dynamic pricing becoming more pervasive online and a bigger factor at store level in the years ahead? What are the primary hurdles stalling adoption?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"Not leveraging technology and data that enables dynamic pricing is definitely leaving money on the table! "
"I mean, the first time you see a price change in front of your face is likely the last time you shop at a retailer. It would be for me."
"The primary hurdle is the lack of one platform servicing all channels in real-time – or what we call “retail synchrony.”"

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17 Comments on "Has dynamic pricing hit a rut?"


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Chris Petersen, PhD.
BrainTrust

The biggest and best online retailers have been using dynamic pricing for years. Their advantage opportunity is “real time” feedback on clicks and conversion. Competitive price comparisons are also easier online. The challenges are much more significant in-store where data is “not connected.” While Professor Sanders is right about retailers leaving money on the table, the question facing most physical retailers is the ROI on the substantial investment required to execute dynamic pricing.

Oliver Guy
BrainTrust

For me the biggest barrier is the in-store technology. I have long felt that the business case for electronic shelf-edge labels is not big enough unless you can combine them with other technologies. Integrate electronic shelf-edge labels with in-store traffic counters, a real-time understanding of inventory, competitive pricing and price elasticity modelling and you have the ingredients for an incredible business case and a superb first application of IoT in-store. Something that analysts believe can double to overall profitability of the store environment.

Paula Rosenblum
BrainTrust

I don’t see it and I’ve never seen it as having traction.

I mean, the first time you see a price change in front of your face is likely the last time you shop at a retailer. It would be for me.

For what it’s worth I think its usage online is overstated as well. I see price parity. Not dramatic price changes.

Bob Amster
BrainTrust

I have always believed that dynamic pricing online can only help to confuse, frustrate, and disappoint the consumer. However.the ability to simply change prices for a limited period of time – to offer Kmart’s old Blue Light Special – online and in-store is an important feature that generates excitement and may boost sales, without the three negatives above.

Adrian Weidmann
BrainTrust

Not leveraging technology and data that enables dynamic pricing is definitely leaving money on the table! This lost revenue includes time and labor efficiencies, inventory management, customer trends, spoilage, and customer satisfaction. A recent study showed that grocery stores throw away 43 BILLION pounds of food away each year. That’s 10 percent of annual food waste in the U.S. That translates to more than $2 billion at just 5 cents/pound! Dynamic pricing could alleviate a significant percentage of this waste and drive that much more revenue. The fact that most retailers simply don’t know what products are actually on their shelves further compounds lost revenue. Once again we’re back to the lack of accurate visibility to the supply chain – a topic we’re all too familiar with on these pages.

Dave Bruno
BrainTrust

One of the biggest challenges for dynamic pricing will be neither cost nor complexity; rather, consumer acceptance will be very difficult to attain. Pricing is a huge part of shoppers’ trust equation, and if prices are changing before their eyes while they shop, trust will erode quickly – and dramatically. There are many solutions that impact conversions and also built trust that should come before we resort to dynamic pricing.

Ryan Mathews
BrainTrust

All of my research indicates that consumers in brick and mortar stores want fair and honest pricing, so much so in fact that they prefer it — at least as a construct — to lowest price. Dynamic pricing works online because it is what shoppers “grew up” with and see as a norm — if in fact they are aware of it at all. But I agree with Paula on this one, no consumer is going to be happy watching a price change in front of them, even if it is going down. They are smart enough to figure out that if prices can go down they can also go up.

Ralph Jacobson
BrainTrust

The global perennial hesitation to implement the available technologies to automate more aspects of dynamic pricing shows that the ROI has yet to be definitively communicated to retailer leadership.

Verlin Youd
BrainTrust

Agreed, and that ROI will have to include the significant impact of customer reaction to such a pricing approach … positive or negative.

Ralph Jacobson
BrainTrust

Good point, Verlin!

Ken Morris
BrainTrust
Ken Morris
Retail industry thought leader
5 months 27 days ago

The primary hurdle is the lack of one platform servicing all channels in real-time – or what we call “retail synchrony.” We decentralized point of sale 50 years ago and we have yet to move it to the cloud. When we move it to the cloud we will be able to provide “the Amazon experience” at the store level. We will know what we are selling in real-time, we’ll allocate in real-time, we’ll staff in real-time, and we will stop crossing a Manhattan street with yesterday’s information. Pricing has evolved from chain pricing to division pricing, zone pricing, individual store pricing and the “brave new world” is customer-level pricing.

Why is retail always the last to embrace technology? This is a problem that should have been solved 10 years ago but the retail software vendors and retailers themselves have been slow on the uptake. Dynamic pricing is coming, it’s inevitable.

Ken Wyker
Guest

Dynamic pricing has legs if it is applied to maintaining competitiveness on pricing or helping move excess inventory before it spoils. I also like the idea of using it to create promotional excitement as Bob mentioned.

The way to destroy the benefits is to try to use dynamic pricing to maximize margins, by charging more when and where you can. Once customers get wind of that, trust will be lost.

Camille P. Schuster, PhD.
BrainTrust

Unless dynamic pricing is done in a way that is satisfactory to consumers (which would require a major investment in technology and employees), it will be rejected. Those consumers who are price conscious do compare the price of individual items across retailers to determine where their basket (not an average basket or one created by the retailer) results in a better price. If the retailer is not using technology to do the same comparison and if consumers see prices swing significantly for no reason, they will go somewhere else.

Gordon Grant
Guest

It would be helpful to clarify exactly what dynamic pricing means. If we’re talking about minute by minute changes then I agree that this would be a terrible customer experience. Imagine that you take half an hour to walk around the grocery store loading your basket and by the time you’ve reached the checkout your bill is 50% higher! On the other hand, less frequent price changes (but still more frequent than today) might be entirely feasible.

The technology exists today. So I think that the question isn’t “if” but “when” we will see more of this in the bricks and mortar stores. The vendors and retailers just need to work out what is acceptable by shoppers. Maybe only price decreases are applied during store hours and price increases are held over until the store is closed?

I’m also seeing more and more AR led solutions where the shopper sees their own special price, regardless of what is printed on the shelf.

Shep Hyken
BrainTrust

Dynamic pricing will become easier to use as technology combines with data to create a simple and seamless solution to what has been complicated and cumbersome to execute. Pricing strategies, changed in real-time, will be managed by AI that interprets everything from competition, supply and demand, and much more. We’ve just scratched the surface!

Craig Sundstrom
Guest

“…still not fully embraced or understood…” or just not liked?
It’s no secret that the RW fellowship has been lukewarm at best to the concept, feeling that any extra monies picked up will be (more than) offset by alienated customers; and I share that concern. I’m also curious how it can be handled in a world where printed signs on the shelf are still the mainstay of displaying prices. An expectation like “everyone can just scan the UPC on their smartphone” is naïve.

So yes, I think we’ll see greater use of it, but it won’t be a stampede … and I’m fine with that.

Mark Price
BrainTrust

As retailers improve their inventory tracking in order to be able to provide “boy online, pick up in store” (BOPIS) their ability to execute dynamic pricing improves. If a retailer can do dynamic pricing online, then they should be able to do at retail if the price tags are electronic.

The cultural change is all about control. Merchants believe that they have some special insight into consumer needs and price sensitivity, when the only real way to gauge is to conduct price sensitivity analysis and test dynamic ranges.

wpDiscuz
Braintrust
"Not leveraging technology and data that enables dynamic pricing is definitely leaving money on the table! "
"I mean, the first time you see a price change in front of your face is likely the last time you shop at a retailer. It would be for me."
"The primary hurdle is the lack of one platform servicing all channels in real-time – or what we call “retail synchrony.”"

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