Dynamic pricing, where demand and availability directly affect the price paid by consumers, is making a comeback. Before the industrial revolution, all prices were dynamic. Consumers and shopkeepers would haggle over prices before reaching a price that both could live with. However, bargaining required shopkeepers and their apprentices to know the cost and availability of each item they carried.
As stores started carrying more merchandise, the trading market was not sustainable for most businesses. It was too complicated to remember the pricing details of each item in the store, and negotiations led to longer queues and increased customer dissatisfaction.
The price tag, which first entered stores in the 1870s, was invented to address the challenge of the retail environment. Retailers no longer needed to remember all the pricing details for everything they sold, and consumers had better visibility into product prices.
Dynamic prices, however, are picking up. Airlines have been using it since the 1980s, later followed by hotels and other hospitality service providers. The pricing technique didn’t hit most retail areas until ecommerce really started to take off. During the 2014 Christmas period, Amazon.com Inc. changed the prices of 80 million products every day and today the company makes over 250 million price changes every day.
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, in recent years we have seen some significant technological advances, 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 electronics sellers, to implement dynamic pricing that will finally help level the playing field with ecommerce sellers.
Introducing dynamic pricing to a generation of consumers accustomed to fixed prices is not easy. However, the benefits of dynamic pricing for retailers will be too powerful to pass up.
Are consumers ready?
Today, no one wonders why a flight that takes off one day before Thanksgiving costs more than the same flight two weeks ago. Consumers know that the same hotel room can be 30% more expensive on the weekend than on a Tuesday night. And most online shoppers have realized that the price they see on Amazon today is likely to change tomorrow.
We have seen toll road prices drop as traffic decreases and we have seen an increase during rush hour. Sporting events charge more for “premium” games and required artists sell out their concerts at higher ticket prices. Ride-hailing apps add unexpected costs during periods of busy time.
It took time, but today’s consumers are savvy enough to understand that prices change, often in their favor. They are not used to a physical store, but they understand the concept of supply and demand and will grow quickly to appreciate the benefits it offers them.
If an electronics company releases a new TV model with new features and a great viewing experience that is in high demand, retailers using dynamic pricing will raise the price of the TV. Without the price increase, consumers would never have a chance to buy the TV – all units would sell out immediately. However, by 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 milk containers that typically have a shelf life of three to four weeks. In most grocery stores today, a liter of milk that expires in a 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 which will last longer. By using dynamic pricing, consumers should be able to buy older carton at a discount, as it is less in demand.
When dynamic pricing is done right, it creates an environment where consumers willing to spend the money have access to the products they want and creates savings areas for consumers who are willing to buy less in demand items.
The new normal of retail
There is an inevitability regarding dynamic pricing on the retail side that cannot be overlooked. Dynamic pricing has proven its ability to increase revenue by up to 30% and increase profit margins by 11%. These are numbers that retailers fighting for every dollar cannot ignore.
The feasibility of implementing dynamic pricing has really been the only thing that has prevented retailers from installing a dynamic pricing platform, and these barriers are falling rapidly. The ESLs, mentioned earlier, will represent a real game changer for brick-and-mortar stores. It creates a synergy between the pricing engine, the prices displayed for customers and the POS system.
ESLs allow pricing managers to adjust prices based on inventory levels, consumer purchase history, and competitor pricing. It introduces digital transformation into the store, and by doing so, it allows brick-and-mortar stores to compete with online sellers as well.
Waste is another area where dynamic pricing will really serve brick-and-mortar stores and this has applications for any product line approaching an unsaleable date. This may be electronics being replaced by a newer model, holiday products, and of course the biggest of all is grocery shopping.
Supermarkets throw thousands of dollars every day on produce, baked goods, delicatessen, meat, dairy and poultry. Encouraging consumers through reduced prices to purchase items that are still safe to eat but not as fresh as they once were will significantly reduce the volume of food discarded.
AI-powered dynamic pricing engines can accurately identify the exact price needed to move products that will soon be unsaleable, further protecting sales and profits.
Building brand loyalty
When used effectively, dynamic pricing plays an important role in cementing brand loyalty. By integrating the dynamic pricing engine into your customer relationship management (CRM) system, artificial intelligence tools have the opportunity to generate attractive offers for individual consumers.
Using historical data, for example, the dynamic pricing engine can recognize that a high percentage of customers who buy one camera appear to be buying a second camera after two years, and nearly all camera purchases include a case as well. To build loyalty, your dynamic pricing engine can generate user-specific offers, inviting customers who bought a camera two years ago to come back and buy a new model.
The incentive can be a discount on the camera, case, or a combination of the two. The key is to use the pricing engine to recommend offers that encourage customers to return to the store and make subsequent 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 contexts, make this transition inevitable.