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The pros, cons and misconceptions of dynamic pricing for retailers

Advances in technology are making it increasingly possible for retailers and hospitality companies to be more intelligent with their pricing strategies, including multiple intra-day changes according to factors such as impending expiry dates on perishable goods, changes in the weather and over-stocked goods.

Smart North London food store Kavanagh’s reduces the price on goods in its bakery section by 30% on its electronic shelf-edge labels (ESLs) at 6pm each day to clear them and avoid any waste. In a similar way, ice cream could be promoted on a particularly warm day in to boost sales, or prices of burgers could be reduced at quiet times of the day when employees are kicking their heels.

It all sounds sensible. However, there are problems with adopting such dynamic pricing. This starts with the frequent misrepresentation by the media and consumers of dynamic pricing as surge pricing.

This began with Uber introducing surge pricing in New York City on New Year’s Eve 2011, with prices soaring by as much as seven-times the standard rates. The result of this activity is that this term has now become interchangeable with dynamic pricing for many people.

Matt Pavich, senior director of innovation and strategy at software firm Revionics – which works with global retailers on their pricing strategies – says: “There is some negativity on dynamic pricing, but in retail the pricing invariably moves down. Overall, I’d calculate that 80% of dynamic pricing is down and only 20% up.”

Critical public reception

Whatever the reality, companies have been caught out badly by perceptions. Fast food brand Wendy’s recently released the good news that it wants to invest $30m in the roll-out of digital menu boards across the US. Unfortunately, it also mentioned that it was going to test features in these menu boards, including dynamic pricing.

The company had to fight a barrage of criticism against what was deemed to be a cunning plan to bring in surge pricing. Wendy’s explained that its intention was the complete opposite, as it had no such plan to raise prices when demand was highest, but instead to change menu offerings by offering lower prices during the slower times of day.

Companies face a hostile response to any hint of dynamic pricing. Pub company Stonegate Group suffered a critical onslaught last year when it hit the deadlines for announcing that it was adding 20p to a pint during peak times at 800 of its pubs. This followed the increased pricing it introduced for England games during the previous year’s World Cup that largely went under the radar.

The company has since sought to clarify that it was widely misreported that dynamic pricing was being introduced as a “new policy”. Along with many hospitality companies, Stonegate has used flexible pricing for many years around very busy times to reflect additional costs such as security, licensing and staff when there is a surge in demand. These have all been set within the group’s point-of-sale systems.

On the flip-side, this same flexibility allows for promotions, including happy hours, 2-for-1 cocktails, and discounts at different times on different days of the week. This could all be encompassed in dynamic pricing.

There is a feeling at Stonegate that flexible pricing practice has been somewhat relabelled and to a degree exaggerated in some quarters, when consumers are actually used to paying different prices for drink and food at different times of day or days of the week, such as weekdays versus weekends and lunchtime versus evenings, or around big-ticket seasonal events such as New Year’s Eve and the World Cup and European Championships – similar to many other sectors.

Phil Urban, CEO of Mitchells & Butlers – which runs brands including All Bar One and Nicholson’s – concurs with this view: “In our case, yes, we do it. It’s always been around in the industry when operating costs for particular events are high, then sometimes people price accordingly. Surge pricing has been around forever and a day… It’s almost been reported as if it’s something new. I’ve been in the industry for 34 years, and it’s always been there.”

When operating costs for particular events are high, sometimes people [will] price accordingly
Phil Urban, Mitchells & Butlers

Clearly many sectors have been using dynamic pricing for years, including the airlines and hotels whose technology systems have enabled them to use smart pricing techniques. It could be the case on a plane that everybody has paid different prices depending when they made their purchase. Cinemas and leisure attractions are also increasingly embracing this dynamic approach.

Cinema chain Vue last year stated that it was accelerating the roll-out of flexible pricing across its outlets as it found growing demand from consumers. Likewise, Merlin Entertainments announced that it is to build a dynamic pricing model to introduce to its top 20 global attractions by the end of the year.

Scott O’Neil, CEO of Merlin Entertainments, says: “If [an attraction] is in the UK, and it is August peak holiday season, sunny and a Saturday, you would expect to pay more than if it was a rainy Tuesday in March.”

Halfords has also been using various data points for its dynamic pricing activity involving the call out service within its motor division. There is no fixed price for an engineer to visit a customer – it is instead based on various factors such as the distance the vans are away from the customer, the time of day, and the availability of the relevant tools/products. Its technology prices the call outs at a level that ensures it can achieve a consistent level of profitability.

An eye on sustainability and sensibility

Against this sensitive backdrop, a growing number of retailers are tentatively investigating their pricing strategies with dynamic capabilities. This is both online and in-store where electronic shelf labels (ESLs) are deployed and can be updated remotely at the touch of a button.

A growing number of retailers are installing such labels including Aldi and Lidl as a quick way to update prices, which is a frequent occurrence in any retail store, especially within the grocery sector. They also, of course, provide the opportunity to introduce dynamic pricing.

Kalman Mezei, manager at Kavanagh’s store, says the ability to change prices easily on ESLs provides the opportunity to use dynamic pricing. This is initially deployed within the bakery section at his store, but the plan is to use it more widely.

“We’re looking at other areas. It will be about over-stocks with approaching expiry dates. We’ll set a time-frame for a reduced price and then return to full-price when we re-stock with new products,” he adds.

The company is working with VusionGroup and Smartway, and has recognised an obvious entry point into dynamic pricing is to target a reduction in waste.

Christophe Menez, co-founder of Smartway, says: “Our collaboration with Kavanagh’s and VusionGroup shows that reducing food waste can align seamlessly with stores maintaining quality, reducing costs and boosting profits. Cutting-edge technology like this will allow the retail sector to take huge steps forward in reducing its considerable environmental impact.”

David Morgan, vice-president of customer value propositions at VusionGroup, says great gains have been made with retail clients using dynamic pricing to cut waste by reducing prices, but there have also been examples where its clients have increased prices – however, great care has to be taken. He suggests it should only be done when it does not affect the customer.

“If the weather is hot, then some people say put ice cream prices up. Why would you do that? Just promote it and sell more by using it as a basket-driver,” he adds.

Equally sensitive is Pavich at Revionics who says “guardrails” are essential for dynamic pricing, and the use of artificial intelligence (AI) can help retailers better manage their pricing activity and avoid any sensitive and ethical issues, such as reducing men’s shaving cream but not women’s. Also, it is pointless to reduce an 8oz product but not 16oz, as customers will simply buy two of the smaller items.

Clients such as REMA 1000 in Norway has set rules such as not putting prices up during the day, only overnight, and it has limits on the number of price changes it makes in a certain period as it could be more sensible to initiate a single larger change.

Understanding the customer

The ramifications of making changes dynamically is currently being investigated by Decathlon with its partner PricingHub. It is testing the effect of price changes on certain products online through A/B testing and in its stores using its ESLs in a test bed of 10 outlets that are compared with a control group of 90 stores.

Jerome Laurent, CEO of Pricing Hub, says the work involves aspects such as deciding on the frequency of changes based on customer feedback.

“The higher the frequency then the more potential benefits and profits there could be but the drawback could be confusing the customers, especially for frequently purchased products,” he says, adding that one retailer found there was less sensitivity to changes made on a Monday compared with a Sunday.

The recipe for retail from the past will not work in the future
Philipe Rebelo, Decathlon

Philipe Rebelo, pricing transformation leader at Decathlon, says: “We want to understand the customer better with their price sensitivity so we can find the best price. What are they willing to pay? If we don’t do this [project], then we will be dead. The recipe for retail from the past will not work in the future.”

Even if dynamic pricing is not a life-or-death scenario for retailers and hospitality companies, there is no doubt that its growth will be fuelled by the ongoing impact of AI and the increased volume of transactions that are being undertaken digitally.

It is one thing for the likes of Wendy’s to change prices on a menu board that is visible to all its customers in a physical restaurant, and a very different thing to dynamically change prices on a one-to-one basis with a customer via their mobile phone. These interactions can involve myriad personalised data points to determine pricing based on factors such as the previous behaviour of the customer and their loyalty to that company.

For Rosie Bailey, co-founder of Nibble – which works with retailers including Eve Sleep and Bridgeman’s – there is another dynamic pricing strategy that companies can adopt through Nibble. The AI-powered e-commerce chatbot is a plug-on on a retailer’s website and automates the process of engaging shoppers in a negotiation over price online. This is a route into dynamic pricing – with pre-set pricing parameters – which she says can drive significant uplifts in conversion.

Bailey suggests pricing is very much about emotion and that people often put in demands for 20% discounts on products via Nibble, but end up with 3% off and are very happy with this: “It’s about people feeling they have the right deal and have had a ‘human’ interaction.”

Whatever the media, and certain sensitive customers, think about dynamic pricing, the upsides to businesses of using such solutions will invariably lead to its greater use, but retailers and hospitality companies must handle its adoption with extreme care.

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