As a seasoned traveler, you’ve probably discovered that finding the lowest airfare involves buying tickets at the right time. Surprisingly, that window may be six weeks before the scheduled departure date.
For years, airlines, hotels, and rental car companies have used dynamic pricing technology to provide buyers with optimal prices that maximize profit margins and revenue. And using data from loyalty card programs, some grocery stores offer different prices to different consumers for the same item. Especially in retail, where profit margins are razor thin, retailers can use every possible advantage, including offering real-time prices based on their customers’ shopping history and behavior.
In the past, many brick-and-mortar retailers have perceived the cost of implementing in-store price changes as too high to be worth the time and money. But today, not only is the technology becoming more advanced, but the cost of implementation is dropping. Soon, the benefit of higher profit margins will likely significantly outweigh the costs.
For this reason, brick-and-mortar retailers are becoming more interested in electronic self-labels that sync with the point-of-sale system and update prices on shelves in real time. With this system, retailers can change prices throughout the day—for example, they can have a morning rush sale or a clearance sale to vacate fresh products by the end of the day. France has been a major adopter of this technology and, as hardware costs have gone down, more and more retailers are becoming interested in the technology.
For instance, grocery stores such as Safeway and Kroger are using their loyalty card programs to analyze how their customers shop in order to deliver personalized pricing given the items they buy most. Using different methods to determine personalized prices, they give different coupons and prices to customers based on their shopping behavior in the hope that they will spend more.
Shrewdly, Safeway uses its digital pricing personalization program to respond to newsworthy events. During a recent power failure in Washington, Safeway offered local residents coupons for freezer products, empathizing with their customers and making it easier for them to restock once the power came back.
As we learn to create dynamic pricing in the brick-and-mortar world, it is obvious that retail executives will want to have more price discrimination online as well. Online retailers are experimenting with dynamic pricing, personalizing pricing based on customers’ buying and browsing histories. E-commerce stores can use dynamic pricing in various creative and effective ways. For example, when customers abandon their carts, online retailers can send an email offering a special discount to complete their purchase. Or, if a customer tends to browse in a particular category, the retailer can offer a category discount that expires in 24 hours.
Although large online retailers such as Amazon have been using dynamic pricing successfully to maximize profits, electronic retailer Best Buy is also dedicated to a dynamic pricing model and has started price matching against its retail competitors in every product category. At this year’s Shop.org Summit, Amitabh Biswal, merchandising operations manager at Best Buy Canada, explained, “If a customer is able to get a price online, they should be able to get it in the store as well. So we’re able to respond and react to competitive [competition] more quickly.”
Although offering customers the most competitive prices may be essential for a retailer like Best Buy, most retailers may find it better to focus on pricing fairly and building a relationship with each and every customer. For example, Ace Hardware has been working on building a pricing demand system that emphasizes customer relationships and places importance on fair pricing rules above all else.
Although much of this has been manual to date, the technology is catching up to provide live dynamic pricing through the online shopping channel as well. I expect many online retailers and brand manufacturers to initially focus on maximizing the price they can get from each customer—that is, not the lowest and not necessarily the highest, but rather what people are willing to pay for the products they’re interested in buying.
Additionally, some brands and online retailers will see the value of connecting customer loyalty with price. For example, jacket A might be marketed to an existing customer base that always buys sale items, so it will be priced for them as a being on sale. And jacket B might be designed to target a customer segment that always wants the latest fashion and is willing to pay a premium for something unique that only they get access to. This kind of differentiation not only allows the retailer or brand manufacturer to maximize profits on the jackets, but also enables differentiation across retailers.
Now that retailers are realizing that dynamic pricing can increase profits and improve sales, and as more and more dynamic pricing technologies emerge, you can expect to see more retailers experiment and include dynamic pricing in their strategy. From an industry perspective, I think this is exciting. As a consumer, I’m not looking forward to fighting to buy a jacket like I do for my holiday plane ticket.