Andrew Lake, Innovation Manager at the Delta Group, looks into the rise of dynamic pricing, and what retailers need to consider before riding the wave.
Have you ever gone online to buy a flight but ended up deciding against purchasing it at that exact moment…only to find the price has gone up when you check it again the next day? We’ve all been there. But what’s the reason for the sudden price shift that impacts not only airline prices but a number of goods and service purchasable online? The answer is dynamic pricing: when the cost of a product alters based on even the slightest shifts in supply and demand.
Although this reactive, personlised approach to price alteration is predominately an online practise, there is scope for such innovations in-store too. The use of “smart shelves” in the retail space for example – already common in a number of European supermarkets – allows retailers to present digital price displays as a way of highlighting up-to-date deals at different times of day, along with information about the products. Some of the UK’s largest supermarkets have all trialled electronic pricing systems in select stores.
However before riding the personlised pricing wave, there are a number of things retailers need to consider first:
Many consumers aren’t aware of the fact that retailers alter prices on a regular basis, and did so even before the advent of online retail, but as it becomes more noticeable thanks to the web, retailers must consider the perception issues it raises.
Put simply, a customer who observes that a product can become cheaper or more expensive within minutes may not be thrilled at the prospect that they could end up paying more for a product based on little more than, say, the time of day.
Particularly worrisome is the possibility that some users will notice dynamic pricing, but won’t quite understand what’s going on, resulting in a reduction of trust.
2. Data accuracy
Dynamic pricing depends on data, and when pricing is being changed on the order of hours or even minutes, ensuring that the data driving pricing decisions is accurate is critical. While there’s a growing ecosystem of data providers and the techniques by which data is collected and filtered are sure to improve, retailers shouldn’t assume that bad data won’t make it into their systems.
3. Algorithm mishaps
Wall Street and the phenomenon of flash crashes reminds us that algorithms are far from perfect and can produce costly errors. As retailers embrace dynamic pricing models which are of course based on algorithms, thought should be given to how mishaps can be minimized and what policies will govern when a mishap results in a big mistake (eg. customers being able to purchase a product at a ridiculously low price).
4. Altered customer behaviour
As the existence of dynamic pricing becomes more evident to consumers, retailers will need to grapple with the possibility that it could impact customer behaviour.
On one hand, dynamic pricing clearly has the potential to encourage sales, but is it possible that in some instances it could it impede sales? If customers come to believe that the price of a product might go down in the very near future, and perhaps even on the same day, it’s not unfathomable that some of them would decide to hold off on a purchase.
And as every retailer knows, a delayed purchase is much more likely to become a purchase that never happens, or happens somewhere else.
5. Overall experience
While price is an important factor in purchasing decisions and is often the most important factor, retailers should remember that their long-term success will likely depend on their ability to offer much more than that.
Customer service, selection, shipping, return policies and loyalty schemes can also help drive sales, even when a retailer can’t offer the lowest price. These things are often crucial to fostering the brand positioning and customer loyalty retailers covet, so embracing dynamic pricing without addressing overall customer experience is short-sighted.