Dynamic pricing, where demand and availability directly impact the price consumers pay, is making a comeback. Before the industrial revolution, all prices were dynamic. Consumers and shop keepers would haggle over pricing, before reaching a price they both could live with. However, haggling required shopkeepers and their apprentices to know the cost and availability of every item they carried.
As stores began to carry more merchandise, the negotiation market wasn’t sustainable for most businesses. It was too complicated to remember the pricing details of every item in the store, and negotiations led to longer lines and higher customer dissatisfaction.
The price tag, which first made its way into stores in the 1870s, was invented to meet the challenge of the retail environment. Shopkeepers no longer needed to remember all the pricing details for everything they sold, and consumers had better visibility into product prices.
Dynamic pricing, however, is on the rebound. Airlines have been using it since the 80s, later followed by hotels and other hospitality vendors. The pricing technique didn’t hit most areas of retail until e-commerce really started to take off. During the 2014 Christmas season, Amazon.com Inc. reportedly changed prices on 80 million products every day, and today the company makes over 250 million price changes daily.
Retail stores have lagged behind their online counterparts. Left in a similar situation to retailers in the 1870s, today’s grocery and retail businesses believe that implementing daily price updates simply isn’t feasible for stores carrying tens of thousands of products with paper price tag stickers on almost every unit.
However, we’ve seen some significant technological advancements over the past few years, which are enabling retailers to implement a dynamic pricing strategy. The advent of electronic shelf labels (ESL) makes it easy for retailers, from supermarkets to electronic vendors, to implement dynamic pricing that will finally help level the playing field with e-commerce vendors.
Introducing dynamic prices to a generation of consumers who are used to fixed pricing isn’t easy. However, the benefits of dynamic pricing for retailers will be too powerful to pass up.
Are Consumers Ready?
Today, no one questions why a flight taking off a day before Thanksgiving costs more than the same flight two weeks earlier. Consumers understand that the same hotel room can be 30% more expensive on the weekend than on a Tuesday night. And most online shoppers have come to understand that the price they see on Amazon today will likely change tomorrow.
We’ve seen toll road prices drop as traffic wanes, and watched it spike up during rush hour. Sporting events charge more for “premium” games, and in-demand performers sell out their concerts at higher ticket prices. Ride-hailing apps add surge charges during busy time periods.
It’s taken time, but today’s consumers are savvy enough to understand that prices change, often in their favor. They aren’t used to it in a physical store, but they understand the concept of supply and demand, and they will quickly grow to appreciate the benefits it provides to them.
If an electronics company releases a new TV model with new features and a great viewing experience that is high in demand, retailers using dynamic pricing will increase the price of the TV. Without the price increase, consumers would never have the opportunity to buy the TV — all the units would sell out immediately. However, using dynamic pricing, that item will always be available to consumers willing to pay a premium for it.
On the other side of the equation, we have containers of milk which typically have a three- or four-week shelf life. In most grocery stores today a liter of milk set to expire in one week will have the same price as a liter of milk with three weeks of shelf life remaining. Most consumers will pass on the older carton, taking the fresher carton that will last longer. Using dynamic pricing, consumers should be able to buy the older carton at a discount, as it is in less demand.
When dynamic pricing is done right, it creates an environment where consumers who are willing to spend the money have access to the products they want and creates areas of savings for consumers who are willing to purchase items that are less in demand.
Retail's New Normal
There’s an inevitability regarding dynamic pricing from the retail side that can’t be overlooked. Dynamic pricing has shown its ability to increase revenues by up to 30% and grow profit margins by 11%. Those are numbers that retailers who are fighting for every dollar can’t ignore.
Feasibility in implementing dynamic pricing has really been the only thing holding retailers back from installing a dynamic pricing platform, and those barriers are falling quickly. ESLs, which was mentioned earlier, are going to be a real game changer for physical stores. It creates a synergy between the pricing engine, the prices displayed for the customers, and the POS system.
ESLs put pricing managers in a position to change prices based on inventory levels, consumer purchase history, and competitor pricing. It introduces the digital transformation to the store and in so doing, empowers physical stores to compete with online sellers as well.
Waste is another area where dynamic pricing will really serve physical stores, and this has applications for any product line that is nearing an unsellable date. This can be electronics that are being replaced by a newer model, holiday products, and of course, the biggest one of them all is grocery.
Supermarkets throw out thousands of dollars’ worth of produce, baked goods, deli, meat, dairy, and poultry every day. Incentivizing consumers through reduced prices to purchase items that are still safe to eat but not as fresh as they once were will significantly decrease the volume of discarded food.
A.I.-based dynamic pricing engines can precisely identify the exact price needed to move soon-to-be unsellable products, further protecting sales and profits.
Building Brand Loyalty
When used effectively, dynamic pricing plays a powerful role in cementing brand loyalty. By integrating the dynamic pricing engine into your customer relationship management (CRM) system, A.I. tools have the opportunity to generate compelling offers for individual consumers.
Using historical data, for example, the dynamic pricing engine can recognize that a high percentage of customers who purchase a camera seem to purchase a second camera after two years, and nearly all camera purchases also include a case. To build loyalty, your dynamic pricing engine can generate user-specific offers, enticing customers who bought a camera two years ago to come back and purchase a new model.
The incentive may be through a discount on the camera, the case, or a combination of the two. The key is using the pricing engine to recommend offers that encourage customers to return to the store and make follow-up purchases.
The benefits that dynamic pricing promises to retailers, coupled with the benefits available to consumers who have already been exposed to it in other settings, make this transition inevitable.
Pini Mandel is co-founder and CEO of Quicklizard.
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