How Dynamic Pricing Can Revolutionize Your Retail Store’s Profitability

What is Dynamic Pricing in Retail and ECommerce?

Think of dynamic pricing as stock prices. Like stock prices keep fluctuating (adjusting) to reflect several market variables, in dynamic pricing, the prices of products are adjusted by retailers (software/automation) for better-selling prospects, increased revenue, and other business objectives. In dynamic pricing, prices can change even several times in a day based on different parameters. A recent phenomenon seen with restaurants on food delivery apps is that the prices are significantly lowered one or two hours before closing for the day. It helps clear stocks that may not remain usable for the next day. It lowers the burden of storing. It leads to increased revenue. This is dynamic pricing at play here when some restaurants experience lower demand at the dead-end hours or when the demand for certain products (e.g. evening snacks) goes down by late evening or dinner time (region-specific).

This blog highlights the potential of dynamic pricing in retail and eCommerce with examples.

Dynamic Pricing as Chalk and Cheese for Your Business

Revenue Optimisation

While revenue maximisation may seem like a natural objective, it does not portray a realistic approach and may compel additional spending on advertising and promotions. Speaking at the market level, sales are affected by demand and demand fluctuates owing to many external reasons. You cannot sell Christmas cakes in June or let’s say, it can be tough. One of the best retail pricing approaches is revenue optimisation.

During peak demand times, businesses can safely stick to their regular tariff without bothering much about competition especially when there is certainty that the demand and supply are neck to neck. On the other hand, businesses can resort to offering discounts and promotions during times of low demand. By doing this, sales and revenue can be brought to optimised levels.

Dynamic pricing is not just associated with demand-time but also demand-product. There are products whose demand always remains high for a myriad of reasons. For example, if there are only a few sellers of a product in a market, the price of that product tends to remain high and rigid. The demand for such products continues to remain high as long as there are improvements in the supply side. Such sellers tend not to meddle with the prices of those products but may remain flexible with the prices of their other products. It allows them to optimise their profit margins across their assortments.

Another desirable situation dynamic pricing helps achieve is the avoidance of revenue loss. By aligning prices with the market, the possibility of demand generation is increased which can then lead to increased sales – the scope of which might have been slim to none before the price adjustments.

Enhanced Competitiveness

Pricing is one of the fundamental constituents of the marketing mix. Being good with pricing makes a business good in one of the fundamentals of marketing. This makes adopting the best combination of retail pricing methods a critical decision for retailers. Dynamic pricing adds agility to marketing capabilities. It directs businesses to respond to pricing changes initiated by direct competitors. This phenomenon could be checked by comparing the prices of the same products across different eCommerce platforms. There might be minor exceptions (e.g. exclusive availability) or minor price variations but those differences are not strong enough to pull customers away from their favourite platforms further alleviated by factors like membership discounts, quicker delivery, etc. Dynamic pricing is not something new in brick-and-mortar retailing. In this age of digital information and analytics, making dynamic pricing work demands the use of advanced tools and strategies for business intelligence and insights.

Dynamic pricing also provides a window of opportunity to stabilise market position and increase market shares. When a retail business consistently provides competitive retail pricing, it eventually becomes a USP for that business. Over time, customers begin to develop a positive perception resulting in continued purchase habits. Customer retention is a critical requirement for stabilising market position. Continuity in following dynamic pricing with due improvisations made over time has further add-on benefits in the form of increased customer acquisition, increased sales, and increased market share. As mentioned earlier, pricing is a fundamental constituent of the marketing mix and being consistently attractive with it adds to brand recognition in a compelling way. It is possible to ignore an advertisement but not attractive prices.

Superior Customer Experience

Different retail pricing policies share many overlapping characteristics. An interesting aspect of dynamic pricing is personalised pricing and vice versa. These two are types of each other. When dynamic pricing is based on consumer behaviour, it is personalised pricing and because personalised pricing varies, it is a type of dynamic pricing. Personalised pricing can be a very effective tool to elevate customer experience. Prices otherwise unavailable to others can provide a sense of exclusivity and draw customers closer to a brand or business. An effective form of personalised pricing in traditional retailing is classification-based pricing. This could be based on ticket size, frequency of purchase, type of products purchased, demographics, etc. Personalised pricing could also work during specific events or times of the year to encourage purchases.

Due to the benefits of extensive digitisation, personalised pricing is easier in eCommerce than in brick-and-mortar retailing. However, its essence remains the same for both channels – to add more value to purchases by offering products at attractive prices.

The most important aspect of personalised pricing is its subtleness. When adding dynamics to a retail store pricing strategy, it is important to ensure that the efforts do not come out as unfair or discriminatory. Many retailers tend to ignore this aspect when formulating or improvising their retail store pricing methods.

Personalised pricing is not always a one-way street. For example, lowering the price of a luxury product may actually depreciate its perceptive value and consequently, its demand. Or a customer who visits an ultra-modern departmental store for its exclusive environment may not like the idea of getting discounted items at the cost of a degraded environment only to be offered discounts.

More Efficient Inventory Management

As dynamic pricing increases the scope of sales, the inventory cycles tend to get shorter. This can lead to a reduction in holding costs and bring more accuracy to purchase and replenishment decisions. Businesses can place orders with greater certainty and judiciously plan resource utilisation. This also gives them room to experiment with innovative marketing initiatives like making changes in the assortment to target new segments.

Dynamic pricing can play a decisive role in avoiding situations of overstocking and understocking. When these situations are likely to occur, businesses can deal with them by using dynamic pricing. For example, when stock levels are high, a reduction in prices can help quickly deplete inventory. In the same way, when demand is high but supply is on the shorter side, the normal prices can be safely retained without applying routine discounts and promotions.

Another big advantage with quicker inventory cycles and a high degree of precision in demand forecasting is that the scope of wastage and pilferages stands reduced. When your business attains a quicker inventory cycle, the need for holding inventory also gets reduced. When the period for which inventory stays in your store or warehouse is shorter, the possibility of damage or any kind of pilferage or value erosion also shrinks. Since dynamic pricing helps in bringing shorter inventory cycles and providing the scope of improved accuracy to demand forecasting, it helps in the reduction of wastages.

Fewer Challenges with Dynamic Pricing

Fluctuating prices may not augur well for customer experience and brand loyalty. Imagine buying a product at a certain price only to see that the price is lower the very next day. This is terrible for brand loyalty. Even in routine circumstances, changing prices may portray a perception of instability for a brand or business in the minds of customers.

Dynamic pricing is one of the most contemporary and advanced retail pricing techniques in terms of its potential as well as required capabilities. It calls for a certain degree of experience and expertise. Without strong analytics capabilities and dedicated attention, dynamic pricing may backfire. Thus, having the right expertise and tools is essential for the effective implementation of dynamic pricing. It may not be possible for small and micro businesses to invest in building and maintaining such capabilities.

Dynamic pricing may result in a shrinking of profit margins for all players. While prices getting lower and lower may be good news for customers it can turn out commercially stressful for retailers. Increased demand also puts stress on supply chain capabilities which can cause to increase service charges. For example, warehousing and logistics service providers may have to charge higher to cope with the increased demand for their services emanating from low prices. Further adverse implications on supply chains may also include the creation of temporary jobs and shallow salary hikes.

Ethical concerns are natural to arise in dynamic pricing. It is prone to be viewed as unfair or even discriminatory. For example, dynamic pricing may involve charging different prices based on spending patterns. Non-frequent buyers may find it unfair to be charged more than frequent buyers. Things can get complicated when dynamic pricing is applied to goods of essential nature not yet under price regulation.

Different regions may have different rules and regulations governing pricing, consumer rights, monopoly, competition etc. Businesses have a responsibility to abide by the laws of the land they are operating in.

Quick Recap

The essence of dynamic pricing in retail is achieving retail pricing optimisation to optimise sales and achieve other business objectives in areas like inventory management, customer experience, market share, and competition.

Dynamic pricing allows businesses to safely stick to their regular prices during times of high demand. By applying discounts and promotions during sluggish demand periods, dynamic pricing creates the scope for sales optimisation. The same approach works with a product-demand equation. Dynamic pricing provides an opportunity to optimise sales and revenue over a given period by aligning prices on the yardstick of ongoing demand.

Dynamic pricing calls for being responsive to pricing changes initiated by competitors – enhancing the competitiveness of a business on one of the fundamental constituents of the marketing mix i.e. price.

Dynamic pricing helps stabilise market position and increase market share by consistently providing competitive prices which is a key factor in customer retention and acquisition.

Dynamic pricing can also be used to personalise customer experience. Any form of positive exclusivity can help draw customers closer to a brand or business and pricing is a powerful driving force. However, personalised pricing is not always a one-way street and subtleness is a critical requirement to make this form of dynamic pricing work.

With an improved scope of sales, dynamic pricing can help maintain shorter inventory cycles which can further lead to a reduction in holding costs and higher accuracy in purchase and replenishment decisions.

By adjusting prices to align with ongoing demand and encourage sales, overstocking and understocking of inventory can be easily avoided. Inventory optimisation also leads to lesser wastage.

Dynamic pricing comes with fewer challenges too:

• Fluctuating prices may make customers feel violated on value received at both higher and lower prices for the same product.
• Successful implementation of dynamic pricing demands expertise, tools of analytics, and dedicated attention which can be a tough ask for many micro and small retail stores.
• Continued price slashing may eventually end up hurting all the players and putting stress on supply chains.
• Dynamic pricing can be easily viewed as unfair and discriminatory.
• Pricing is also a sensitive subject from a regulatory perspective and lack of abidance may attract penalties and a bad reputation.

About Your Retail Coach

YRC is a retail and eCommerce consulting undertaking specialising in setting up of new enterprises, business growth and expansion, and business process solutions. With more than a decade of experience, YRC has worked with over 500 clients in more than 25 industries with an accomplishment ratio of over 94%.

For any kind of assistance in devising retail pricing strategies for your business, feel free to drop us a message and one of our retail consultants will shortly reach out to you.

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