Dynamic pricing mythbusters, and some surprising key considerations
March 11, 2016 06:39 PM
There’s no putting that genie back in the bottle: Today’s shoppers can (and increasingly do) check item prices across all channels before committing to a buying decision, whether in the store or online. Every retailer, whether brick-and-mortar, online or multi-channel, must give serious consideration to how to compete with responsive merchandising that keeps the shopper front and center – while not recklessly giving away margins and profitability.
I’ve spent hundreds of hours with dozens of retailers over the past few years crafting the best answers to that very question. So let me share some surprising insights – and burst a couple of bubbles – on the topic of effective dynamic pricing.
Myth 1: Dynamic Pricing Equals Quickly Matching Competitive Changes
A lot of retailers I talk to think of dynamic pricing as a broad-brush undertaking – meaning they plan to follow competitors’ price changes, just more quickly than they currently do. In its simplest expression, this takes the form of “Amazon is our main competitor, so we need to respond to their every change on every product in every category – and fast.”
But there’s one major downside to that approach: It touches off a race to the bottom that retailers can’t win.
The need to respond to competitive prices is very real, but retailers really must respond to the shopper in the marketplace. The all-important nuance is knowing which competitive prices you need to respond to and when and how those responses (or decision not to respond) will affect your business. For example, leveraging sophisticated analytics can tell you if an online competitor changes prices frequently for a given item or product category, how it drives changes in demand and how it should that influence YOUR pricing – whether you’re an omni-channel or pure-play online retailer. In simple terms, the analytics help you determine how frequent your pricing updates need to be and on what items. In a recent video interview during FMI Midwinter, Lowes Foods Stores President Tim Lowe explained how they use dynamic pricing, with a center-store focus in particular, to embody their customer-centric philosophy.
Myth 2: Dynamic Pricing = Only Having the Technology to Change Prices Fast
There are two equally significant facets to effective dynamic pricing - having the technology to change prices fast AND having the business intelligence and process to do so intelligently.
- The technology infrastructure to respond in near real-time – technology enablers. Of course much depends on how you as a retailer define fast response; it may mean intra-day price changes for some and weekly price changes for others. Either way, we’ve invested to enable retailers to respond at the speed they need for their business model and competitive environment.
- Sophisticated analytics so you don’t chase unimportant competitors or needlessly give away margin. This is where analytics of competitive cross-elasticity by product or product category are important to drive both pricing recommendations and competitive pricing policies.
Key Consideration 1: Effective Dynamic Pricing = Surgical Focus
The marriage of technology and analytics lets you key in on what really matters. You need disciplined, surgical focus to know how to meet or beat competition only on the items where shoppers really care about price – and in the context of managing your entire assortment. Steve Neptune, eBags’ former SVP of financial planning and strategy, had this to say about dynamic pricing, “Instead of pricing with a machete, now we do so with a scalpel.”
Girisha Chandraraj, SVP and Chief Digital Officer of Essendant and COO of its CPO Commerce Division, recently stated about dynamic pricing:
“We change prices constantly. We don’t really subscribe to a methodology of the ‘right time of day’ to change prices. We constantly monitor the market and make price changes as we see conditions evolve. We can go days or weeks without changing prices on certain SKUs — it all depends on the market and competitive landscape for that product. Each category has its own competitive complexion.”
Key Consideration #2: Understand the Interplay between Online and In-store Pricing
Dynamic Pricing doesn’t mean that you focus only on responsive pricing in your digital channels. You need an approach that takes both online and in-store pricing into consideration, and that gives you insight into how changing a price on one channel impacts demand in your other channels. To be sure, this doesn’t always mean you change in-store prices to exactly match those online, but it does mean you are evaluating and balancing for both. The ability to do what-if scenarios to understand cross-channel impact from potential price changes helps you strike that balance.
Key Consideration #3: Dynamic Pricing ≠ Static Technology
Even if you have analytics that are relevant and well-tuned for your environment today, they will grow stale and static very quickly as the pace of market and competitive changes continues to accelerate. Stale or static analytics don’t help – or can even hurt – in a dynamic pricing environment. It’s important to have self-tuning modeling engines that update continuously as new data becomes available, whether it’s weekly or daily. The continuous feedback loop keeps retailers able to realize value and measure response, which is especially important in a dynamic pricing environment. You aren’t doomed to make decisions about new items based on historic, stale data that may be inadequate or even misleading. Retailers should continuously adapt to the most up-to-date prices – which is critical particularly in markdown optimization.
At the end of the day, successful retailers need to have both the agility and the smarts to know when, where and how to reprice.
Revionics provides price-optimization software for retailers.