Dynamic Pricing Gains Ground
Controversial among critics, dynamic pricing is not a new concept. In e-commerce, retail giants such as Amazon and Walmart have been engaged in an all-out price war for some time, constantly lowering prices to stave off competition. As analytics and automation technologies continue to make the price adjustment process simpler, however, the race among top e-commerce providers is quickly becoming a race to the bottom.
According to a recent report from Econsultancy, pressure from Amazon is forcing retailers to start adopting price intelligence software that scans product prices every 10 minutes and automatically adjusts them according to how low Amazon's prices are. Twenty-two percent of retailers have implemented the software already, 7 percent plan to deploy it within the next six months, and 36 percent plan to do so in the next year, Econsultancy found.
"The practice is becoming more and more common in retail and e-commerce," says Jeanine Miklos-Thal, a professor of pricing and industrial economics at the University of Rochester. "Prices on Amazon change constantly and in real time [at every page load], which makes them a competitive force in the market."
Most retailers rely on rules-based dynamic pricing technology, which automatically adjusts the price of a product when certain criteria are met. For example, a company can decide to automatically lower an item's price by one dollar if a competitor drops its price by 50 cents or more. "Rules-based dynamic pricing depends on longitudinal analyses, and those rules can be defined by a variety of factors, which are not seen by consumers," explains Keith Anderson, vice president of strategy and insight at Profitero, a price intelligence provider.
But this approach has its drawbacks. Rules-based dynamic pricing doesn't take profit margin into account, and can lower prices to just pennies above the manufacturer's cost. Eventually, prices become so low that selling the product doesn't make business sense, and e-retailers temporarily stop offering it or discontinue it permanently.
Still, there's a place for dynamic pricing in retail—it just has to evolve. Feedvisor, a company that's pioneering an algorithmic approach, offers one alternative. Instead of looking at competitors' prices alone, Feedvisor takes brand loyalty, brand equity, and customer service into account. The company "never lowers price based on others' prices," Shmuli Goldberg, Feedvisor's director of marketing, says. "Rather, we raise prices based on better performance," he explains.
If one company charges the same price as another but consistently has better customer reviews, Feedvisor will raise the first company's price. Customers care about additional factors, such as delivery speed or product support, "almost as much as they care about price," Goldberg says.
Personalization also plays a role in the evolution of dynamic pricing. Living at the intersection of regular and sale prices, personalized pricing takes consumers' preferences and purchasing behaviors into account with offers that aren't widely available. "This means offering free shipping on any item that's already in a consumer's cart, or offering a five-dollar coupon for an item that a consumer recently viewed," Anderson says. "It's about making items that a customer is already interested in even more lucrative."
Even brick-and-mortar retailers can take advantage of personalized pricing. Department store Kohl's, for example, offers special pricing for shoppers who prefer to shop late at night or in the wee hours of the morning. Though this personalization is more broad than what e-retail can achieve, it can be game-changing. In a review of prices for more than 1,000 household items available at Amazon, Kohl's, Walmart, Target, Macy's, and others, pricing analytics firm 360pi found that Kohl's was consistently 30 percent to 60 percent above Amazon's pricing, but also reported the healthiest financials of the group.
"It's not surprising that dynamic pricing is becoming more intelligent," Miklos-Thal says. "Consumers are getting more accustomed to seeing price fluctuations, and I suspect that...other kinds of dynamic pricing will only become more prevalent."