Dynamic pricing is sometimes seen as deceptive, but in fact it’s beneficial to all
Last week HuffPost shared an article about Target utilizing dynamic pricing, or changing prices on different items depending on location and channel. While I think the article provided great insights into some of the challenges retailers face around pricing, it was told more from the perspective of the consumer, and talked about how dynamic pricing might be seen by customers as dishonest or advantageous.
As a retail pricing strategy consultant, as well as a former Target buyer and category manager with experience setting prices for my department, I wanted to offer another perspective on the topic of dynamic pricing. Call me biased if you want, but I think zone-based and channel-based pricing is an important concept, and one that benefits both retailers and consumers. So, if you are interested in another take on the issue, I’d like to share mine.
Dynamic pricing is more ingrained than we think
First, let’s just acknowledge that it really is a challenging thing for retailers to determine how they’re going to manage their omnichannel and overall pricing strategies, with the knowledge that consumers may not like finding prices higher in some places than others.
However, we often see consumers accept the idea of paying more for a different type of experience. For instance, I am happy to pay more for having my groceries delivered instead of having to pick them up, or paying an Uber surcharge to go downtown on New Year’s Eve. We as consumers inherently understand we will pay more for a hotel in Manhattan than in Newark.
So, people are generally okay with those experiences, and with the concept of paying more for one location over another. The important distinction is perception. As long as a consumer perceives a price to be fair and non-arbitrary, then they are okay with price changes, even if it varies by channel or geography.*
The truth is dynamic pricing is an element of modern retail. Amazon does it, airlines have done it for ages. More and more consumers are coming to accept, and even expect, dynamic pricing.
It’s not just about profit
I think another common misconception consumers have around dynamic pricing is that retailers only use it to improve their profits. Now of course, business is business, and they have to protect the bottom line. But a lot of retailers also genuinely want to offer a competitive price to consumers and make sure that customers are able to purchase a product at an affordable, highly-appreciated price point.
It’s a strategic objective to be priced competitively on the items most important to consumers, to get shoppers in the door, and to provide them with a product at the price that they want. But to do that, retailers have to find their margins on other products, or in other locations. And it’s really consumer shopping behavior that tells retailers where they are willing to pay more in one area over another.
Which is another important point to make. With a data-driven zone pricing strategy, you are taking inputs from the customers to help determine those prices. Location-based pricing is based on consumer shopping behavior, not a specific strategy to target a certain group.
But a customer’s willingness to pay a certain amount still isn’t the full picture. Zone pricing can also be heavily influenced by competitive footprint and cost structure.
Stores and retailers in general will be more competitive and have lower prices when there’s more competition close by. And this is just normal. It has existed in retail since the ancient marketplaces of Mesopotamia. If you have a vendor across the street from you hawking the same products at a cheaper price, you are going to lose sales unless you can match or go even lower.
And that’s actually a good thing for the consumers in that area who now have numerous options and lower prices. But again, retailers have to get that margin elsewhere. So, a store with less competitive pressure might have higher prices to make up for it.
The other factor is cost structure. A store in San Francisco or Washington D.C. is going to have higher rent than Columbus, Ohio, and therefore a higher cost structure. Getting products to a store in Alaska or Hawaii is a lot more expensive than within the contiguous United States. Complex supply chains can also drive up costs. If a retailer’s costs vary by location, then it’s reasonable that their prices will as well.
It all comes down to balance. If a retailer has a varying cost structure, varying competitive structure, and they’re using data and analytics to determine which areas need prices to be a little higher or a little lower, then it’s kind of a win-win for everyone. Because the customers who are most in need of low prices tend to be more elastic, which leads to cheaper prices in that zone. Meanwhile, the retailer tends to get better margin where they need a little more margin. It creates a healthy, evolving ecosystem for everyone.
For a lot of consumers that see differentiated pricing, it’s easy to focus on the higher price and only think about margins. But by nature, if one price is higher that means the other is lower. We could at the same time look at the lower price and think instead about the savings. And suddenly the perception changes. There’s a duality to it.
Dynamic or static, it’s all about fair
In short, I don’t think consumers should feel tricked or taken advantage of by dynamic pricing, as long as they are getting a fair price for a product, and there’s transparency behind why prices are what they are. Many retailers even do some level of price matching to make sure that a customer feels they are getting a fair price.
Looking back at the last five years, or even just at last year, it’s clear that pricing continues to become more dynamic, and I can guarantee pricing will move faster a year from now, five years from now, and so on. As more people move to shopping online, as technologies continue to improve and emerge, more and more retailers will turn to data-driven and AI pricing solutions, like Revionics, to keep up with the market and with the competition.
* Indiscriminate Promotions Cost Retailers, a Forrester Consulting study commissioned by Revionics, May 2018