IRCE recap: Retailers have to be careful with dynamic pricing

Discussion
Photo: Franklin Heijnen via Wikimedia Commons
Jun 14, 2016
Matthew Stern

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?

Braintrust
"While retailers have more and better tools for monitoring competitors' prices and optimizing prices to maximize image and profitability, risks abound."
"Pricing is a tricky thing but when you make it about the customer, you just might win at the game."
"The key to all pricing strategies is how they appear to the consumer."

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15 Comments on "IRCE recap: Retailers have to be careful with dynamic pricing"

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Tom Redd
Guest

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!

Keith Anderson
BrainTrust

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.

Ralph Jacobson
BrainTrust

We have been talking about dynamic pricing since ESLs first came to market. We know far more today than we did only a year ago. First, you don’t change prices during daytime store hours, unless you’re dropping prices. Simple, basic stuff there. However, imagine a world where you can sense and respond in real-time to competitor pricing changes and market fluctuations. Capturing and leveraging external forces data, like social chatter, news items, weather and local events in order to learn how retailers can use dynamic pricing across all channels to beat the competition. That’s the kind of advanced stuff that increased profits are made of! Well, there are some innovators that are doing this today.

All retailers can benefit from dynamic pricing. As retail channels blur, price coordination across every touch point becomes essential. You can now use data and insight from physical stores to influence and price confidently online. By applying price sensitivity to determine competitive reaction, retailers can tailor their response to competitor changes and market fluctuations, to make more intelligent pricing decisions. This is all great stuff to leverage.

Adrian Weidmann
BrainTrust
Having been involved in all aspects of digital signage since 1997, I’ve long held that the ability for gas stations (oil companies) to change their displayed prices has had a direct impact on the erratic fluctuation of gas prices. How many of us have felt helpless as we pay 8 cents more for gas within a two hour span? That’s a big profit boost for all the gas that’s in the supply tank you just drove over! The same holds true for in-store prices. Increasing the price of a Big Mac at the McDonald’s in Times Square late Friday afternoon for the tourist crowd is one thing, but changing your pricing like the airlines do based upon your searches and timing can be a very dangerous practice for your brand. Digitally-empowered shoppers are not naive and when they catch you taking advantage (and profiting!) off of their shopping journey and behavior they WILL share their discovery and anger with the world. The use of electronic shelf labels (ESL) could have a more meaningful social aspect. When shoppers discover a great product and price based on units sold on a particular day, the ESL begins to flash — alerting other shoppers… Read more »
Ken Morris
BrainTrust

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.

Ryan Mathews
BrainTrust

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.

Mohamed Amer
BrainTrust

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.

Jenn Markey
Guest
1 year 4 months ago

Dynamic pricing can be a useful tool in a retailer’s arsenal, but it is not a one-size-fits-all approach. It is most appropriate:

  • For aspiring price leaders;
  • To strategically price anchor items in the shopping basket to increase the overall size of the cart (think TV as the anchor, accessories as the revenue/margin adders);
  • and, similar to the above, for retailer-reported best seller (or most popular) lists to reinforce a position of price leadership while only sacrificing margin on a few items (the modern-day loss leader for the e-commerce age).

For example, this past holiday 360pi observed that Amazon was two to three times more price dynamic on its best sellers vs. overall category.

And, if/when considering dynamic pricing, a retailer needs to carefully evaluate the impact on shopper experience and loyalty of constantly changing prices. For example, while largely acceptable in the travel sector, we likely all remember Coca-Cola’s quick retreat from temperature-based pricing at vending machines after strong customer backlash.

So proceed with caution when considering dynamic pricing. The starting point is to evaluate whether this tactic will support or compromise your desired brand image with customers and associated attainment of business goals.

Lee Kent
BrainTrust
A bit off the mark however, here is my pricing story. My sister and her family used to live in Greece. After she had been there a few months and had picked up a little Greek, she began to notice that the locals were not paying the same prices she was. She paid what was marked on the goods but they seemed to be paying less. Hmmm! As her Greek improved, she finally asked a shop owner and was told that she was a rich American and could pay more. To which she said, I am not rich! I live here just like you do. Bottom line, the rest of her time there was spent arguing for the better prices everywhere she went and those who would not give it to her? She never darkened their doors again. Hawaii does the same thing, however, they got smart about it. If you live in Hawaii, you can get a card that says you are local, yep a card carrying local, and you pay different prices. Now, that is a case of surprising and delighting your local/most loyal customer base. Pricing is a tricky thing but when you make it about the… Read more »
Kai Clarke
BrainTrust

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….

Craig Sundstrom
Guest

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.

Larry Negrich
BrainTrust

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.

Kenneth Leung
BrainTrust

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.

Cheryl Sullivan
Guest

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.

Mihir Kittur
Guest

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.

wpDiscuz
Braintrust
"While retailers have more and better tools for monitoring competitors' prices and optimizing prices to maximize image and profitability, risks abound."
"Pricing is a tricky thing but when you make it about the customer, you just might win at the game."
"The key to all pricing strategies is how they appear to the consumer."

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