Dynamic pricing can be a highly effective competitive tactic to develop and reinforce a price leadership position and drive conversions with target shoppers. However, dynamic pricing is not a ‘one-size-fits-all’ solution. Here’s what retail executives considering dynamic pricing need to know.

Dynamic pricing describes price adjustments based on real-time market and economic factors, including supply and demand, competitive intelligence and other internal and external factors. Although brick-and-mortar stores have traditionally avoided undertaking significant amounts of inter- and intra-day price changes due to labor costs and system limitations, the rise in both online and mobile shopping has added pressure to become as dynamic, if not more so, than their online counterparts.

In reality, few North American retailers have adopted technologies to support in-store price dynamism. For example, there has been only limited adoption by North American retailers of electronic shelf labeling solutions, including tags and hangers. Moreover, today’s shoppers are less inclined to price compare by physically visiting multiple stores and are more inclined to use their smartphones to run real-time comparisons of in-store prices to online competition.

For aspiring price leaders, dynamic pricing comes with the territory. It’s very difficult (if not impossible) to claim a price leadership position and maintain profitability in the e-commerce age, as Wal-Mart is learning the hard way with its Every Day Low Price positioning. Prior to venturing out into the hyper-competitive world that is dynamic pricing, retailers should take a step back and ask some initial questions about how this strategy fits with their business objectives and target market.

1. Is dynamic pricing consistent with the brand value proposition to shoppers or will it incite consumer backlash?

Constantly changing prices has the potential to erode the relationship a retailer has built with its target market. Retailers should have a clear understanding of what the existing and desired relationship is between shoppers and their brand, and what shoppers seek from a store and why they come for certain products. Retailers should also know if their value proposition is based on customer service, experience, convenience, price or some combination. Lastly, smart retailers should consider the impact that constantly changing prices will have on their customers and whether a lack of predictability would impact loyalty.

2. Does the organization have the financial ability and/or tolerance to ride out the initial loss of margin until sales volumes rise to offset them? 


Lower prices mean slimmer margins, but over time can lead to bigger profits thanks to increased sales volumes. When it comes to dynamic pricing, the organizations that succeed are those that are able to sustain lower margins (and profits) before reaping the benefits of a corresponding rise in sales. This involves a lot of data analysis and product-, category- and business-level forecasting and often requires an enterprise class retail intelligence partner or solution.

3. Does the organization have the systems and processes to price dynamically in a timely, efficient and accurate manner?

For many, the presence of legacy data, price management, and/or point-of-sale systems can make the ability to price in real time a herculean effort. Retailers successfully deploying dynamic pricing have typically done so in tandem with significant investments in price intelligence and optimization. Importantly, integrated solutions tend to be far more effective and scalable than all-in-one tools and are more likely to provide accurate, actionable pricing insights.

4. Does the pricing strategy vary by products and/or categories or is it unilateral across all items?

All items are not equal in the eyes of the shopper, so retailers should not assume that a single pricing strategy applies across all stores and all products, all of the time. Instead, retailers might consider taking a page from Amazon’s playbook, which applies dynamic pricing more to selected categories and product groupings and during certain shopping periods. On average, Amazon changes prices on 15-20% of their hard goods assortment at least once a day. However, this past Black Friday, Amazon’s price dynamism was three times higher on its own self-reported bestsellers in sampled categories than the overall category sample.

5. Does the organization employ omnichannel pricing, where shoppers are given the same price regardless of the channel or path to purchase?

A 2015 Google study found that, “82% of smartphone users will consult their phone while in a store, searching 37% more inside department stores than they were last year.” This channel fluidity makes it increasingly difficult for retailers to unify these cross-channel experiences for the shopper. With differing overhead and supply chain costs between online and in-store, many retailers are racking their brains trying to find the optimal balance between where and how to target their shoppers, and how to streamline their paths to purchase.

Different pricing on different channels is not a death sentence by any measure, but can lead to unpalatable questions about transparency and the impact on customers’ brand loyalty. Retailers should weigh all options, factors, and potential ramifications and benefits when planning their omnichannel pricing strategies, including whether or not dynamic pricing is the right approach.

Dynamic pricing is not a simple yes-or-no decision. Rather, it is an accumulation of brand value, target market, shopper engagement, category strategies and product elasticities (shopper reactions to price changes). With dynamic pricing becoming a key part of retail strategies today, retailers should carefully consider the questions above before incorporating it into their omnichannel approach.

360pi provides data about online retail product pricing and selection.

 

 

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