Direct Line Blog

Retail dynamic pricing comes of age—probably

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Source: Duramax2003 from Reddit
Source: Duramax2003 from Reddit
I spent two teenage summers changing shelf tags at a hardware megastore, so I know firsthand that presenting competitive and compelling pricing to consumers is hard work. For years, brick-and-mortar retailers have craved the kind of real-time pricing control their online counterparts enjoy. But their envy requires a two-part solution. First, devising just the right price to maximize every consumer's consumption requires deep data insight. Second, presenting those prices is a serious logistical challenge in the average retail environment. The solutions to both may be at hand.

Sahir Anand, vice president and research group director at Aberdeen Group, says that at best only one in four retailers has the big data know-how and analytical chops to successfully (read: profitably) execute a full-fledged dynamic pricing strategy. "To make a serious change in pricing strategy takes years of analysis and rigorous understanding of the impact it will have on the customer base."

Nothing that a little diligence and a lot of expertise can't solve. Now, how to present prices dynamically without hiring an army of teenagers armed with markers to run around the store changing prices on the fly? Electronic shelf tags? Nice idea, but costly to implement. Smart carts? Lovely in your boutique, but plenty of stores have enough trouble keeping their cheap, garden variety stainless steel models rolling on four wheels and out of fraternity backyards.

Enter the smartphone. It's the customer's responsibility—no need to worry about vandalized digital shelf tags and purloined smart carts. While not quite universal, mobile connected devices are getting there. They present a wealth of location, historical, and demographic information to the savvy pricing strategist. Rolling up customized on-screen promotions into a scannable barcode is efficient for the retailer and fun for the customer. What could go wrong?

The same thing that's been complicating digital marketing for more than15 years: too many offers and too little relevance. Early adopters are still working out the kinks—and burning off an excess of enthusiasm—with mobile promotional push tools, which can vibrate a hole in your pocket at an average shopping mall. "There's a lot of technology out there that is enabling in-the-moment, at-the-shelf, moment-of-truth offerings," says Milen Mahadevan, senior vice president of client solutions at personalization strategist dunnhumby. "The challenge is to be relevant in that moment. There are a lot of people in that space and the winners will leverage those channels with a very personal and relevant touch, not inundate people with a series of notifications or they will see a large degree of opt-out."

As I reflect on how different the world could look to a shopper in just a few years, I offer a word of caution to brands considering a whiz-bang dynamic pricing plan. Just as algorithmic high-frequency trading revolutionized stock trading but has produced some shocking runaway failures—like Knight Capital's $440 million loss on automated trading mistakes earlier this month—elaborate personalized or dynamic pricing and promotional schemes provide a fertile opportunity to make more mistakes faster. Short-term promotions have always carried the risk of undermining long-term strategic positions, and nothing is quite so short term as a price change made by the second. "Demand elasticity is not that easy to calculate," Aberdeen's Anand warns.
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