Dynamic Pricing: Is “Surge” Pricing Coming to Retail?

8.3_shutterstock_90542899_BW
image_pdf

One of the biggest trends in retail today is dynamic pricing, where retailers can quickly change prices based on data-driven algorithms that incorporate demand, inventory, and competitors’ prices. This pricing technique allows companies to embrace technology and data advances to aid retailers in everything from pricing based on demand or inventory to price-matching competitors, including online retailers.

This might seem like a new trend, but most people deal with dynamic pricing regularly and have for years: If you have ever bought an airplane ticket or booked an Uber ride during a “surge,” the price you paid was based on dynamic pricing. For airlines with low variable costs, dynamic pricing can help ensure planes take off with as few empty seats—and lost potential profits—as possible. Ride-sharing companies like Uber and Lyft charge different rates depending on the time of day, day of the week, and whether an event is going on; their pricing model is based on the idea that when they charge more per ride, and therefore pay drivers more per ride, more drivers will work during high-demand “surges.”

While the concept itself is not new—some even suggest it is reminiscent of haggling systems—retail is finding innovative ways to adopt dynamic pricing in stores. One advantage e-commerce retailers have had over brick-and-mortar stores is their ability to change prices quickly with a few mouse clicks. Stores, on the other hand, typically need many employees to change each individual shelf label or product sticker or place signage around the store promoting discounts; given this pricing model, store prices change infrequently. Electronic shelf labels (“ESLs”) are enabling brick-and-mortar stores to make the shift to dynamic pricing. ESLs can be changed as instantaneously as online prices, allowing stores to price products with more flexibility to account for real-time inventory changes or competitors’ prices.

Why does this matter? Many customers rely on comparison shopping before making a purchase. Because retailers know shoppers will check how their prices compare, there is newfound pressure on retailers to be transparent about their prices and keep up with competitors’ pricing. Dynamic pricing can give customers an assurance they are getting the best price, especially when compared with static in-store prices that rarely change.

For years now, some stores have responded to this by offering price-match guarantees. However, those require shoppers to be diligent in their comparison shopping research and then address the price discrepancy with the store—something not all shoppers want, or are willing, to do. And those who are not willing to do so often turn to buying products online instead. But if stores can change their prices as quickly as online retailers, in-store shoppers are more likely to trust they are getting a good deal.

While dynamic pricing was cost-prohibitive for many retailers in the past, as technology has improved, the benefits are starting to outweigh the costs for many retailers. This pricing model makes sense for consumers but when used well by retailers, it can also drive revenue by increasing employee efficiency and improving customer loyalty. And if it is a win-win for both retailers and their customers, it might be here to stay. Soon, we might all be crossing our fingers we aren’t at the grocery store during “surge” pricing.

Follow us on Twitter: @annelockner, @SarahFriedricks

Leave a Reply

Email addresses and comments are not displayed publically.