Dynamic Pricing in the Age of Amazon
Gary Hawkins, Advancing Retail
Richard Kestenbaum does a good job of explaining dynamic pricing and how it can be used by internet retailers in his recent Forbes article Your Friend May Pay Less Than You For The Same Things You're Buying. Online retailers have available countless points of data on you as a shopper when you visit their site including such things as if you’re a repeat visitor, what competitors sites you’ve visited, what types of products you buy, and so on. Sophisticated online retailers effectively tag shoppers to a cohort, a group or segment of similar shoppers, and may establish cohort-specific pricing.
Dynamic, cohort-based pricing differs from product based demand pricing. Easy examples are airlines charging different prices based on demand or stores that increase the price of umbrellas on a rainy day. The practice of demand-based product pricing is well established in retail and much less threatening to retailers than customer-based pricing.
Richard goes on to explain different scenarios when online retailers may be using dynamic pricing, calling out the practice is entirely legal as long as the differentiation is not based on race, religion, national origin, or other bases of illegal discrimination. Whether you agree or disagree with the idea of dynamic pricing, the practice is here to stay as retailers battle for shoppers.
Some number of online retailers use dynamic pricing and are, understandably, reluctant to talk about their initiatives. Then there are others, like Derick O’Carroll, the CEO of Brightpearl, which provides back office services to online merchants, who bluntly states that “[Retailers that charge] people different prices for the same product are being boneheaded.”
As a long-time retailer with a history of pioneering loyalty in the US supermarket sector and leading early industry learning on customer level economics and behavior, I take exception to Mr. O’Carroll’s comment. As anyone involved in supermarket retail knows, it has been - and continues to be - standard operating procedure for retailers to advertise weekly specials at low margin, sometimes even below cost, to attract shoppers to their stores. The hope is that those shoppers attracted by low or negative margin deals will purchase other products, providing an acceptable level of gross margin to the retailer.
The problem is that there are some number of shoppers who are attracted by the deals and visit the store… but all they purchase are the deals, leaving the retailer with a low-margin sale or even a pure loss. When we first uncovered this insight years ago it was eye-opening. If some portion of sales is being done at low margin or even an outright loss, where are the profits coming from to cover operational costs and provide a profit? The answer: Our most valuable shoppers. In a very real sense, our most valuable shoppers were paying more than their fair share, literally subsidizing the low or negative margin purchases made by their neighbors. As a retailer I did not feel this was right.
That insight led us to driving a great deal of our marketing focus, and spending, to our most valuable shoppers. As my friend Brian Woolf was fond of saying, “If a shopper is going to use a store just for the convenience of buying the low-margin sale items, then let them pay convenience store prices.” Thus started myriad programs designed to direct superior value to our most valuable shoppers through rewards, incentives, and even differentiated pricing - special low price deals available only to our most valuable shoppers.
What was the result of this customer-intelligent approach to retail? A significant increase in sales from the already most valuable shoppers and, as we began to intelligently direct promotional spending to the right shoppers at the right time, a reduction in discount spending and accompanying gains to gross margin.
We did this years ago and proved the impact of customer intelligent marketing. Kroger has followed a very similar strategy for more than the past decade, leveraging its vast customer data to personalize offers and promotions and pricing to great effect. Many other retailers like Albertsons / Safeway are following suit.
While I understand the economic rationale of product demand-based pricing, I do not like it. It too often strikes me (as a shopper) as taking advantage of circumstances (just because its raining and I need an umbrella) that leaves a sour taste with the potential customer. But customer-based pricing makes a lot of sense. When I was a practicing retailer, I would have many shoppers question why we were giving different customers different prices on the same products. When I explained what we were doing, helping the shopper understand that as a ‘best’ customer they help subsidize the ‘cherry pickers’, you could almost see the light bulb go on at the moment of understanding.
Customer-based pricing - let’s call it personalized pricing - takes sophisticated systems and comprehensive digital engagement with shoppers to maximize effectiveness. It is an approach that enables the retailer to make strategic investments against different shoppers that helps maximize the ROI of promotional spending. And when competing with Amazon or Kroger, it offers a path to success.
About the Author
Gary Hawkins is the founder and CEO of the Center for Advancing Retail & Technology (CART) and leverages his unique knowledge and view to new technologies to shape the future of FMCG retail. He can be reached at firstname.lastname@example.org
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