Price Fluctuations: The Digital Reimagining of Supply and Demand in Retail

Dynamic pricing has long been a part of the rideshare experience, sparking unhappy social media posts when “surge pricing” kicks in after a night out on the town or a major event. But while the immediate leap from fluctuating fares for a ride home to varying prices for your lunch might seem a stretch, it's a concept that's gradually making its way into more traditional retail environments. It also marks a significant transformation in how businesses interact with and respond to consumer demand, reminiscent of an age-old practice known by another name: seasonality.

We’re all used to seeing coats command higher prices in September when demand peaks, only to drop by March. But thanks to technological advancements, real-time application of dynamic pricing allows for an unprecedented level of precision on much smaller timescales of hours instead of months. As a result, retailers can potentially offer discounts during quieter hours to draw in additional customers and optimize both sales and customer engagement throughout the day.

However, as retailers apply dynamic pricing principles to everyday purchases, it’s critical they position it properly with consumers and continually gauge their sentiment. If customers experience dynamic pricing as profiteering and price gouging during peak demand, the brand will suffer significant damage, as some retail companies have discovered when they implemented it and lost control of the narrative. Consumers must see dynamic pricing as a reward or a discount so they can get better deals during periods of less demand, such as $1 off a sandwich at 3 p.m.

It's not an impossible task. Bars have engaged in a form of dynamic pricing for over a century with happy hour, and no one thinks negatively of them for doing so. The overarching challenge is not the mechanism of dynamic pricing itself but the narrative surrounding its implementation and positioning. Retailers venturing into this territory must tread carefully, ensuring that their message emphasizes value to the end customer. It’s about crafting a story that places the consumer at the heart of the strategy, underscoring the benefits rather than the mechanics of fluctuating prices.

For example, retailers could emphasize that dynamic pricing improves the shopping experience for consumers by reducing wait times, improving service during busy periods, and offering incentives for customers to visit when stores are less congested. Such strategies not only enhance operational efficiency but also deepen customer engagement and satisfaction. Constant communication is key. Consumers should feel informed and reassured about when and why prices may vary — there should be no surprises. Most importantly, the emphasis should be placed on lower prices during defined periods, not on a surge when their demand is at a peak. This level of openness will help foster trust, turning a potentially contentious issue into a shared benefit.

Digging deeper into the nuances of dynamic pricing, it's also essential to recognize the role of sophisticated customer behavior and market trend analysis. Leveraging research allows retailers to not just respond to current demand but also anticipate future shifts, enabling a proactive and agile pricing strategy. This forward-thinking approach allows retailers to quickly adapt to ever-changing consumer needs and preferences, creating a competitive advantage.

Dynamic pricing isn't just about adapting to new technologies; it's about rethinking how to optimize business and customer interaction. It offers a path to more responsive, efficient and customer-centric retail experiences. In an era when consumer preferences and behaviors are constantly in flux, embracing these strategies has the potential to unlock new ways of staying relevant and competitive.

Daniel Conners is a vice president and principal at market research firm KS&R.