Has dynamic pricing hit a rut?
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?