Imagine if the TV game show “The Price is Right” were to implement dynamic pricing. A contestant would correctly guess the exact price of a new car only to see the price tag begin to move down because another dealer just put that model on sale. The contestant loses! This might be how your customers feel if they find out that a competitive retailer is offering an item at a price lower than the one he just paid.
Price is not the only differentiator that a retailer can deploy, but it is important. As I discussed in a previous post, differentiating by price alone is no longer enough to grow business; retailers must also embrace customer centricity in order to maintain a competitive edge.
Yet price remains an important ingredient in retailing. The success of Amazon’s dynamic pricing model shows just how important. On Black Friday 2015, around 16% of Amazon's prices fluctuated from the previous day, according to 360pi, an e-commerce data firm. And Amazon reported having a “record breaking” holiday season. Walmart, for one, is copying Amazon’s success. Advertising Age reported that Walmart’s online prices fluctuated by about 12% on Black Friday.
Dynamic pricing is beginning to look more like the norm in retailing, rather than a gimmicky fad. According to PYMNTS.com: “More and more brick-and-mortar merchants are stealing pages from online retail’s book—no matter how disruptive the changes might be for consumers.”
So what do consumers think of dynamic pricing? Certainly when they have to pay a premium for flights and hotels during school holidays it does not make them happy. When Uber taxis are busy the tariff can be double—or even triple —the usual fare, which does not make customers (or even some drivers) very happy. However, as a mechanism, it nicely balances supply and demand. And by flagging the surge pricing to passengers it provides full market visibility.
The consumer seems to get used to dynamic pricing eventually. Peter Fader, co-director of the Wharton Customer Analytics Initiative at the University of Pennsylvania, told the Wall Street Journal that consumers typically resist dynamic pricing when it is introduced, but then quickly acclimate.
“Now pretty much every [retailer] is doing it routinely, and doing it with a remarkable lack of backlash,” Mr. Fader said.
There are more facets to dynamic pricing for brick and mortar stores other than simply raising prices during peak times. Real-time electronic shelf pricing can replicate customers’ online experiences, as well as reducing labor costs, and can optimize retailers’ inventories by running out at just the right time! Dynamic pricing models can also reflect supply and demand and aid promotions. Real-time personalized discounts and special offers can further motivate shoppers to head to stores.
If the price is right, the customer will come on down. Dynamic pricing is one of the ways retailers today are getting it right.