IRCE recap: Retailers have to be careful with dynamic pricing
Technology has given retailers new ways to adjust pricing, but dynamic pricing can be a double-edged sword – and retailers need to proceed with caution to avoid some major pitfalls. That was one of the takeaways from a session given by Paula Rosenblum, managing partner at RSR, at the Internet Retailer Conference and Expo in Chicago last week.
Ms. Rosenblum illustrated the trickiness of changing prices in-store in real-time. She gave the example of using electronic shelf labels to lower the prices on bread as the product approaches its expiration date. A customer standing in front of a shelf when the price drops may be pleased. But if a customer sees a real-time price adjustment that increases the price because it’s a high-traffic time of the day, it’s possible that the customer will feel alienated, if not outraged.
Likewise, Ms. Rosenblum illustrated the importance of staying within the same price range as a competitor, even when other factors may make a retailer feel justified in going far above a competitor’s price. She discussed having visited Amazon.com as a customer to do a comparative price check on a product she was interested in purchasing. On at least two occasions, Ms. Rosenblum found prices 25 percent above Nordstrom on Aveda products.
“I don’t care about a couple bucks … but when you’re charging me 40 dollars for something I can get for 30 dollars from Nordstrom, or from Aveda itself, I’ll wait a day,” Ms. Rosenblum said. “For a $2 difference I would have bought from Amazon. At 10 bucks, I say no, you made me feel awkward.”
While the question of whether a retailer should price dynamically — and to what extent — has no hard and fast answer, Ms. Rosenblum gave the following guidelines to avoid pricing catastrophes:
- Keep up with competitors’ prices, whether you choose to match or come close;
- Whenever possible, keep your regular prices standard across all channels;
- Be careful about zone pricing in a price-transparent world;
- Be careful about personalized pricing.
“You have to be very, very careful not to alienate the customer, and not to devalue your brand,” Ms. Rosenblum said.
DISCUSSION QUESTIONS: How can retailers best implement dynamic pricing and make use of comparative pricing intelligence? Which retailers would benefit more from using dynamic pricing models, and which should use more caution?
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15 Comments on "IRCE recap: Retailers have to be careful with dynamic pricing"
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Global Vice President, Strategic Communications, SAP Global Retail Business Unit
No matter the technology — pricing is always a touchy area. This is where real modeling based on real transaction details is critical. Let the models and the math play out the routine first — what impact could a price change play? The elasticity issues and demand elements, along with need factors, are all brought into play. From there decisions on the benefits or issues of dynamic pricing can be determined.
Sub-vertical-wise the dynamic pricing model fits well into the food space where demand and supply are easier to measure. But this is the space that must be careful and use the technology to surprise and to profit. Nothing like a food product price cut on a peak day to move inventory.
GO PAULA GO!
SVP, Strategy & Insight, Profitero
Paula is right that caution is necessary. While retailers have more and better tools for monitoring competitors’ prices and optimizing prices to maximize image and profitability, risks abound.
Competitive intelligence is essentially table stakes at this point. Without a continuous view of your competitiveness (both high-level trends over time and day-to-day, item-level comparisons), it’s impossible to have a coherent strategy.
Pricing dynamically requires more consideration of factors like an item’s role in the retailer’s price image, demand elasticity, stock on-hand, cross-channel pricing strategy, suppliers’ MAP policies and other factors.
The truly automated approaches can be efficient but definitely risk leaving money on the table, deflating average selling prices in the market broadly and adding complexity across channels. We see more and more retailers putting manual checks in place to complement algorithmic pricing.
Global Retail & CPG Sales Strategist, IBM
Managing Director, StoreStream Metrics, LLC
Managing Partner Cambridge Retail Advisors
Dynamic pricing is here to stay. As Paula suggests, you need to be careful to avoid alienating customers but using this technology to surprise and delight customers needs to be embraced. In a real-time retail environment we need to execute a pricing analytics strategy that doesn’t necessarily match others prices but that strengthens the bond between the customer and the brand. The example of promotional pricing close to expiration date is a good one just as seasonal markdowns by product, by store in real-time will be the norm vs. the chain-wide method used today. Real-time retail gives us the opportunity to set pricing rules dynamically by store, by customer … the season has two weeks left before the traditional markdown date, we have a size break at store 101 and Ken buys on sale and is passing the size break rack in store 101, I discount the product immediately and notify Ken on his smartphone. Mark-ups are not a reason to avoid dynamic pricing … just because you can do it doesn’t mean you should.
Founder, CEO, Black Monk Consulting
The key to all pricing strategies is how they appear to the consumer.
Dynamic pricing needs a fair amount of customer education to be successful. Otherwise, Paula is right — customers will love it when the dynamism works in their favor and hate it when it doesn’t.
In my mind it really isn’t a question of which retailers, or even what category of retailers, ought to use dynamic pricing. It all comes down to how well an individual retailer can demonstrate a real benefit to her or his customers.
Without explanation dynamic pricing looks a lot like opportunistic exploitation. If that’s the perception, it will never work.
So the first order of business is to establish a strategy for testing how amiable individual groups of customers are and if they can be taught to believe the system benefits them. Then I’d run a limited test to see if they actually saw a benefit or if I had just convinced myself they saw one. Then — and only then — would I roll out an entire program.
Independent Board Member, Investor and Startup Advisor
Don’t throw out the baby with the bathwater. Nothing wrong with what technology enables you to do, but what you do with it is up to you. If your customers feel that you’re price gouging and taking advantage of them then you’ve sullied your brand perception and no amount of margin improvement can fix the customers’ rush to the exits.
With great power comes great responsibility. Use yours wisely. Paula provides excellent guidelines in the article.
VP Marketing
Principal, Your Retail Authority, LLC
CEO, President- American Retail Consultants
Dynamic pricing in a brick and mortar retailer should be no different than online pricing at Amazon or any other etailer … it is the best way to price and position products for the consumer. This article seems to worry about dynamic pricing like it is something unique, but it has been a standard of the online e-commerce community since its inception. We should welcome dynamic pricing in the brick and mortar retailer just as we have embraced it online….
CFO, Weisner Steel
This sounds like one of those “great in theory/terrible in practice” ideas, even in the bread example. What happens if the loaves on the shelf have different expiration dates (as they most certainly would in any store with less than daily turnover)? Not to mention the difficulty of advertising chain-wide promotions, the possibility of lawsuits claiming discrimination of some kind or other and the plain-old issue of alienating customers Paula noted.
Vice President of Marketing, Reflexis Inc.
Real-time lowering of prices to stay competitive with other vendors in the channel or using as part of a mark-down/clearance strategy are two areas where consumers are accepting as both appear to save them money at the register. However, real-time adjustments based on scarcity of product could have some negative brand impact.
Instituted by Uber’s high-demand rates or across an entire industry (airline seats, hotel rooms, event tickets) then the consumer has little choice other than to accept it. That does not mean they happily accept it. There can be significant long-term negative repercussions if the shopper feels slighted by a pricing strategy.
Retail and Customer Experience Expert
Dynamic pricing is tricky in physical stores because people notice it more than online, where prices are bespoken by design. Doing real time price matching is useful, but you really have to figure out the margins versus revenue formula, and make sure there are manual stops in place. I can imagine automatic pricing being manipulated or start to swing by human error. I guess I can’t see dynamic pricing really adding benefit at the real time scale. Daily I can see, but it creates too much psychological confusion if the prices change during the day in the store.
Chief Marketing & Strategy Officer
As Paula and others on this discussion point out, dynamic pricing is here to stay, albeit to varying degrees in varying industries. Paula’s caution to be aware of competitive price changes even if you choose not to respond is a good one — and using sophisticated analytics to know which competitive prices are important to your customers and which are not is very achievable with today’s technology.
The concept of dynamic pricing will by nature mean different things to different retailers (and etailers) in different sectors, but one of the myths I want to explode is the idea that it entails blindly matching competitors’ price updates. Effective dynamic pricing means having a very surgical focus — responding only when and where it matters in terms of supporting your overall price image and price strategy and in meeting your business goals in terms of customer experience, revenues and margins.
Co-founder and Chief Innovation Officer, Ugam
Retailers should be careful about getting into a race to the bottom with price matching. Customers like a good deal, but they’re also looking for a good shopping experience, and they are often willing to pay a little more based on circumstances, such as if something is hard to find or if the purchase is convenient/offers instant gratification. Retailers should monitor their competitors’ prices, but should also keep an eye on when those competitors may be low on stock for a given product, making it possible to leave prices alone or even raise them for matching products.