Dynamic pricing is a relatively simple and easy step towards the aforementioned goal as it allows retailers to provide the right products at the right prices at the right times to drive volumes and/or margins. It also enables retailers to better meet consumer demands which will increase customer loyalty and help to create a competitive advantage. Dynamic product pricing enables retailers to maximise unit sales and unit margins across four key dimensions: Channel: Pricing differently based on the customer needs of that channel; Per format: Same channel, same customer, different buying need; Time (real-time): Pricing products depending on weather/time of day or depending on product lifecycle (turnover rate in fashion or during promotion period); Customer: For example, pricing differently among different demographics.
This type of strategy considers key demand drivers such as price elasticity, seasonality, cross-elasticity, and targeted price elasticity models at the item and store levels. It also identifies the minimum relative price gap needed to compete effectively for each store or key item, as well as providing ‘what if?’ scenarios to simulate options before executing a pricing strategy.
A dynamic pricing approach
The initial step retailers need to take to follow a dynamic pricing model starts with a review of their PoS systems and whether these systems provide the necessary, quality data about products and consumers’ buying behaviour. This level of insight is vital for retailers looking to successfully control and manage their in-store pricing strategies. The next step retailers should take is to review the level of integration between systems for the head office (HO), the store and the PoS system. Transactional data must be sent back to the HO throughout the day so that it can monitor which stores are doing well and which are selling specific product lines particularly well to aid stock control/availability.
Integrating store systems with PoS systems means that retailers will be able to run more local promotions to drive up sales for specific products, as well as launching personal-level promotions for certain products. For example, a company can detect that a shopper has a preference for organic products from the PoS system and could look then to target them with specific brands. However, the retailer would require real-time stock level information from the store system to confirm that the product is available at the consumer’s local shop. Moreover, to really make use of this insight, retailers will need to analyse this data if to implement effective dynamic pricing - i.e. what is working well and how is it affecting sales? This will enable them to fine tune prices to their optimum level at the best, say, time of the day.
To fully embrace a dynamic pricing strategy, companies will need to ensure that they provide local autonomy to allow individual stores to override HO pricing. This will allow the local store to set suitable prices to meet consumer demands at different times of the day or as local environmental conditions change. This also means that the local store manager can change the prices of specific product lines in a shorter time frame, rather than going through HO. Taking a customer-centric pricing strategy, managed at a local level, will enable a retailer to more accurately: Arrive at the most competitive everyday pricing and promotions; Consider the impact of various promotional pricing strategies; Calculate what uplifts to expect from different promotional and markdown strategies; Plan for the inventory effect of promotional and markdown pricing strategies; Determine the best timing, depth and location for markdowns.
This approach will drive increased revenues and margins by offering the right products at the right prices - as well as reducing waste and stockholding by optimising pricing to deliver sales. For example, Capgemini recently worked with a UK supermarket chain to implement a customer-centric dynamic pricing programme in order to provide a clear understanding of how differential markdowns could be applied in practice within the business. The programme identified savings of up to 20 per cent of the markdown budget for in-scope departments. Capgemini has also recently worked with other retailers to help them increase sales by over five per cent and margins by 2 to 10 per cent per category.
Retailers could also look to take dynamic pricing one step further, by identifying how shelf labels and in-store pricing systems can be integrated. For example, Capgemini worked with Shell De Lucht petrol stations in the Netherlands to implement a dynamic pricing strategy using electronic shelf labels and integrated PoS store systems. As a result, Shell De Lucht was able to adjust store-level prices for groceries four times a day as needed by each petrol outlet. By following this pricing strategy, the retailer discovered that they could raise prices by 10 per cent during the night without selling fewer products.Added to this, it saw margins increase by 1.9 per cent and realised a return on its investment in less than a year.
Dynamic pricing is a simple strategy that retailers can start to execute now to capitalise on short term financial gains as well as developing a more customer-focused offering.This approach means that retailers will be much better placed to respond to changing customer demands/tastes as well as reacting to local pressures such as competitor strategies or even changes in the weather (e.g. quickly launch an ice cream promotion when temperatures rise. Creating a relevant, enhanced customer experience is a key differentiator for retailers in the current climate - moreover, it will help them to lay the right foundations to prepare for the upturn.
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