Feature: The Price is Right
Retailers have been changing product prices depending on supply and demand, weather, and many other variables for years. So why is dynamic pricing becoming such a hot topic now? What are the implications for individual brands as retailers raise the bar on their dynamic pricing capabilities? Who's doing a good job, and who's not?
What's Dynamic Pricing?
The varying retail industry definitions of dynamic pricing have resulted in a fair bit of misunderstanding, so before we delve deeper into the subject, it's important to get on the same page.
Some people think that dynamic pricing is the deployment of technology to implement pricing rules that automate repricing, but implementing rules alone is merely a way of executing price changes. Dynamic pricing is more than just a set of rules; it's a construct aimed at understanding the relationship between your price, competitors’ prices, transactional and third-party data, and consumer signals to sense and predict consumer behavior to apply the price the consumer is willing to pay which also meets your business objectives.
Retailers that know their customers’ preferences, spending histories, tastes and desires can establish the right price for them instead of reflexively matching competitors’ prices, which is always a losing race to the bottom.
What's Different About Dynamic Pricing in This New Era?
Retailers have been known to change prices based on a host of variables. For example, umbrella prices become more expensive when it's raining. So what's different in today's retail environment? Price changes are being driven along three primary dimensions:
- Scale (i.e., breadth, depth and frequency of changes): As examples of the scale of pricing activity, Best Buy and Wal-Mart have each been changing their prices more than 50,000 times a month, while Amazon.com made more than 3 million price changes during the 2013 holiday season — an average of 57 price changes per minute. Those are dizzying statistics no matter what you're buying or selling.
- New data sources: Today's digital consumers aren't stingy about sharing what they like and don't like, and whether they think their purchases are worth the prices they paid. There's an ever-growing supply of consumer product reviews and social media sentiment to determine buying trends and what products might become tomorrow's best-sellers. Information transparency also enables retailers to incorporate other data points, including competitors’ product availability, buyers’ locations, delivery expectations, traffic behavior, etc.
- The democratization of dynamic pricing: New, sophisticated algorithms and technology are accessible to all retailers, not just deep-pocketed enterprise brands, as was the case in the past with expensive price optimization systems. Furthermore, dynamic pricing has become a hot topic due to shopper expectations. Omnichannel consumers armed with mobile devices are often ahead of many retailers from an information accessibility perspective and have come to accept changing prices. These consumers do a fair bit of price research to find the best deals — regardless of the shopping channel.
Taking this information into consideration, Amazon continues to be in the lead and is growing faster than the industry when it comes to dynamic pricing strategy and capability. Many retailers are taking a reactionary approach and are finding themselves running in place. Reactionary tactics, like price matching, aren't strategic.