The Dichotomy of Dynamic Pricing

The world of organised retailing across categories from FMCG to consumer durables, from Apparel to speciality retail, is one of the many sectors undergoing a major shift from the trends we saw in the Pre-COVID era.  New trends such as sustainability & environment protection, personal comfort, connected convenience are shaping a re-calibration of the industry, in ways like never before. Alongside, new challenges have emerged across the social, political, economic and technology landscape which also present immense opportunities for growth.

Exceedingly high inflation, post the end of COVID has impacted the growth of Retail Industry globally across all consumer categories, with consumer discretionary categories getting impacted the most. Even the grocery and essential consumable categories have been impacted driving purchases towards value conscious & In-house brands vis-à-vis established manufacturer brands. As Digital Technology continues to disrupt existing businesses, one area which has emerged as a significant competitive advantage for Retailers is Pricing.

If we go back a decade, Pricing for most goods used to remain static for most part of the year, getting adjusted on few occasions for off-season discounts, Festive/Holiday season discounts and promotional sales 2-3 times in a year. Fast forward into the Amazon era and we had prices getting adjusted several times in a year and the occasional sales becoming much more frequent throughout the year. Fast forward, yet again to the post COVID era, which saw an exponential growth in digital commerce, Dynamic Pricing has emerged as a powerful differentiating strategy in the retail sector where prices change much more frequently such as weekly or even daily, based on a combination of several factors such as demand, supply, competitor pricing, seasonality and several other external factors.  

 If Implemented right, there are several significant strategic advantages to be gained from using dynamic pricing such as:

• Optimising Revenue: Slight price adjustment during high demand periods, if done right, can offer a material revenue uplift, without impacting brand loyalty.
• Improving Bottom-line: Dynamic pricing offers the opportunity to increase margin by making frequent price adjustments for the same good/services
• Competitive Positioning: Retailers can increase their competitiveness by dynamically adjusting prices to match or beat competitors' prices in line with their overall brand strategy.
• Improved Inventory Management: Dynamic pricing can help in managing inventory specifically for perishable products or products/services with a smaller shelf life.
• Cementing Loyalty across key customer segments: Retailers can leverage dynamic pricing in combination with their loyalty solutions to offer differentiated pricing for their different customer segments, thereby forging an even stronger bond with their loyal customers.

Dynamic Pricing which started initially in the travel and hospitality sector by recognising the time value of money and leveraging the importance of planning ahead for better prices vis-à-vis retaining flexibility at a premium price also offers similar benefits in retail, even though there are inherent risks (to be covered in detail part 2 of the Blog) associated with this strategy. Given, the benefits far outweigh the risks, if managed carefully, the strategy is seeing increasing adoption by retailers across a diverse range of product categories. Outlined below are examples of enterprise retailers who have embraced dynamic pricing and continue to invest in the same. 

1. Amazon: By far the most visible example of dynamic pricing in the retail sector, Amazon continues to lead the sector in every innovation including Dynamic Pricing. The online retailer leverages sophisticated AI driven pricing algorithms, adjusting prices daily and sometimes several times a day based on competitor assessment, demand, product life-cycle, and other factors.
2. Walmart uses a balanced approach towards dynamic pricing, focusing on competitive pricing and customer satisfaction. Prices for certain items are adjusted on a daily basis vis-à-vis weekly for most items in grocery, based on several factors such as demand, supply, shelf life and other external factors across stores and online channel to ensure customers interest are always kept top of the mind.
3. Best Buy employs dynamic pricing to keep their prices competitive vis-à-vis digital natives and adjusts prices based on demand fluctuations, especially during peak shopping seasons.
4. Kroger a large American retailer employs advanced data analytics to adjust prices strategically, and ensures that frequent price changes do not cause any frustration among its customers.
5. Most of large European Retailers such as Tesco, Aldi, Carrefour, Morrisons leverage dynamic pricing for better inventory management. Adjusting prices daily based on factors such as perishable products, shelf life allows the companies to get a better price for products nearing end of shelf life, while also benefit ting the consumers.

Given the sensitive nature of the topic and the perception of fleecing the customers with frequently changing prices, more so in the current high inflationary environments, most companies are reluctant to share specific data on revenue or profitability gains associated with a dynamic pricing strategy. However, most companies implementing dynamic pricing have reported positive revenue and bottom-line impact. Given the complex nature of business decisions and a large no of factors impacting the profitability of a company it is extremely difficult to quantify the margin impact across each decision. Some of the studies conducted by McKinsey and University of Pennsylvania’s Wharton business school in the recent past have pegged the margin impact between 2% to 5% on account of dynamic pricing.

While dynamic pricing may be seen by many as a strategy benefiting the retailers primarily, there are significant customer benefits which need to be understood carefully. After all any business can only succeed by delivering value to its customers. Here are a few unmatched customer benefits when companies get the dynamic pricing strategy right:

• Access to Competitive Prices: With prices getting adjusted more frequently driven by the need to stay competitive in a rapidly changing supply-demand environment, customers stand to gain by this fierce competition between retailers. For customers who are willing to forego a certain amount of flexibility, there are significant pricing gains by taking advantage of off-peak discounts offered on shopping, dining, travel and a variety of other services.
• Reducing Waste through Better Inventory Management: Retailers leveraging a dynamic pricing approach are able to pass on significant savings to customers through price reductions on items nearing end of shelf life. This is a win-win for everyone with significant benefits for environment through the opportunity of eliminating waste. With estimates ranging between 25-50% of all perishable goods getting wasted, dynamic pricing offers a tremendous opportunity to reduce this wastage.
• Personalised Discounts: Retailers using dynamic pricing solutions together with solutions such as a Customer Data Platform are able to offer personalised discounts based on customer behaviour, purchase history, loyalty membership, partners/affiliates. Thus, dynamic pricing benefits the customers and also the retailer by helping build the customer lifetime value.
• Enhanced Availability: Customers benefit from increased availability of products as a result of better price and inventory management dynamic pricing based on several factors such as volume, frequency and demand patterns ensure stock out situations are avoided, and products are made available to a wider audience at all times.

 With customers benefiting from immense advantage as a result of dynamic pricing, businesses need to do a much better job with their communication strategies to change the consumer perception of the strategy being yet another way of fleecing customers. For retailers across various sectors from grocery to consumer durables, from apparel and lifestyle to personal care, from healthcare to fashion facing headwinds from multiple directions, dynamic pricing offers a unique opportunity to positively impact the profits and build customer trust with the right strategy and honest communication approach.

How ever no business strategy comes without its fair share of challenges and so is the case with Dynamic Pricing. There are several challenges which must be carefully navigated to get the desired results from this strategy. Part 2 of the Blog, we will evaluate some of the technology, operational and communication challenges and risks associated with Dynamic Pricing and also explore possible options of overcoming the challenges.

Till then, keep your comments and feedback coming.