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.
The Omnichannel Conundrum
Retailers, especially omnichannel retailers, face a conundrum: Should they price a product the same online and in-store?
If they do align prices and find they aren't price competitive online and need to make a change, it can be a nightmare to change prices in-store, especially if the pace of change is constant. If a company tries to deal with the problem by offering to match their own online prices or that of their online competitors, it creates another set of complications and it will start down the path of matching the lowest competitor. Price matching the lowest competitor is often a losing strategy, as most online retailers don't have the fixed costs that brick-and-mortar retailers have.
Many retailers have been caught unprepared to deal with the new era of dynamic pricing. It's a complex problem and there are no easy answers. Technology alone won't solve the problem. Dynamic pricing in today's retail world requires strategic thinking and decision making. Many retailers understand price optimization for brick-and-mortar stores, yet they automatically match their online prices with their in-store prices — which could, in fact, be a very flawed strategy.
Price matching in any form is universally viewed as a victory for consumers. For retailers, however, it's at best a cosmetic bandage that ignores deep wounds below the surface. For that matter, if brands are selling products online and in-store at the same price, they're issuing hundreds or thousands of price changes in-store every day. There's no retailer on the planet that has enough labor to manage hundreds or thousands of price changes every day, so there will always be a difference between online and offline pricing — at least until networked electronic shelf labels become ubiquitous. Even if retailers could spend the time to match prices, the question remains: Should they?
Retailers will need to first arrive at getting answers to their pricing strategy, and then follow that up with the implementation of new dynamic pricing systems.
Dynamic Pricing Systems in the New Era
Many retailers are at the early stages of evaluation and implementation of new dynamic pricing systems. The best of these implementations will combine the collection of accurate, comprehensive data with well-tested models and automation to sense what consumers are willing to pay, and then prices accordingly instead of merely price matching. The best models include competitive price elasticity analytics that help retailers identify which competitors actually impact their sales and which products they're actually competing on.
The not-so-good examples of implementation, however, are characterized by incomplete data, poor quality of data and over-reliance on human effort where automation would be better.
As retailers get clarity on their overall pricing philosophy and strategy, and take suitable steps to develop new dynamic pricing capabilities, brands also need to start taking notice and take steps to get a better understanding of channel pricing. Brands, especially those that have a minimum advertised price (MAP), will learn quickly that their current methods of MAP monitoring are on the way out as retailers start implementing more sophisticated pricing capabilities that enable dynamic pricing, pricing differently (e.g., by style, color and/or size), in-cart pricing and personalized pricing.
Change, as we all know, is good, and this new era of disruption will ultimately be better for consumers at the end of the day. Retailers and brands, however, will need to embrace all of the changes taking place and make sure to take quick action to develop dynamic pricing capability. However, they should only embark on this after they have a better handle on their strategy.
Mihir Kittur is co-founder and chief commercial officer for Ugam, a leading next-generation data and analytics company.