How to Avoid an eCommerce Race to the Bottom with Dynamic Pricing

August 9, 2018
 

Going to see a movie is cheaper on weekday afternoons, or if you’re a senior. Likewise, if you’re looking to book a flight or a hotel for a Friday evening, you’re likely to pay more than you would for the same service on a Tuesday. Want to pay less for that bottle of wine with your dinner? If you’re willing to go out on a Wednesday, you just might.

Dynamic pricing is nothing new. And we’re faced with it more often than we often realize. In the examples just listed, we take it for granted that some things cost less (or more) depending on who you are or when you’re buying.

At the same time – whether we’re talking Uber’s surge pricing model or Amazons variable pricing – there’s no shortage of research and reporting detailing how much people hate the concept when applied to online purchases.

“Dynamic pricing” is a phrase that encompasses a whole host of retail practices, from using tools to monitor competitors to employing markdown timelines that aim to reduce leftover inventory. The advent of “big data” for retail means that shoppers’ activities on websites, mobile devices, and at store point of sale (POS) terminals can be processed and analyzed within minutes, not days, enabling merchants to change prices in response to competitor information and supply and demand as often as the market will bear.

It’s no surprise then that the biggest names in retail are using dynamic pricing to win the discount battle. Amazon notoriously changes prices for 15 to 20 percent of its items more than a half-dozen times a day, and  mass merchants use dynamic pricing to undercut competition for key shopping events such as Black Friday.

But for small- to mid-sized retailers, dynamic pricing carries with it significant risks. Among them:

  • Dynamic pricing can speed the race to the bottom. If implemented in a “keep up with the Joneses” fashion to continually undercut competitors, dynamic pricing can be a slippery slope, leading merchants to destroy their own margins — especially when free shipping and other promotions are factored in.
  • Price discrepancies can bruise merchants’ reputations. While they hunger for discounts, consumers also claim they want pricing consistency across online touchpoints and in stores: a majority say online and offline prices should match, while 60 percent say they expect to see the same promotions and offers in stores as they do online. If merchants begin dropping online prices using dynamic pricing but leave physical stores out of the equation, they’re likely to ruffle feathers as a result. Amazon’s foray into physical stores is instructive: shoppers can scan shelf product labels to see the prices, which are the same (and potentially change as frequently) as online.

As a result, merchants should exercise caution when it comes to dynamic pricing — even (or especially) during the crucial holiday season, when the discounts will fly fast and furious. To wield the power of dynamic pricing for eCommerce responsibly, merchants should:

Start with intelligence. As a first step, merchants can use price comparison and monitoring tools to understand the competitive landscape and to analyze their own past pricing strategies. Merchants should identify which product categories and audience segments are price sensitive, how often prices change for top sellers and sought-after items, and which discounts have been successful in the past.

Further, they should understand how their business’ pricing strategy stacks up against competitors, and use that information to communicate their rationale transparently for shoppers. This exercise can help merchants identify key differentiators, such as superior customer service offerings that are offered at no extra charge, that can serve as the basis for promotions and online content.

Factor in fulfillment efficiencies.  Consumers are obsessed with avoiding delivery charges for online orders: more than 60 percent of all purchases now include free shipping. But merchants who can’t afford to offer standard free shipping can still offer savings tied to fulfillment, by enacting dynamic pricing that reflects the cost of assembling, packaging, and delivering items. For example, if all the items in the cart can be sourced and shipped from a nearby physical store location, the product price can be set to reflect the cost savings compared with delivering from the eCommerce warehouse. This kind of pricing can even win plaudits from consumers for its ultra-transparency: they can see what makes up the total order cost and drive their own discounts.

Upstart Jet.com is a prime innovator in this category, with the price of each product in the cart dropping as more items are added. Shoppers can further lower their costs by opting out of free returns and using debit cards to avoid credit card fees. This policy is transparently promoted as a major benefit of using the site, starting with the tagline “prices drop as you shop.”

Make it all about loyalty. More than 70 percent of consumers are members of loyalty programs, and they expect that such programs offer savings: Instant discounts, reward certificates, and points applicable toward purchases top the list of desired features in a loyalty program. Merchants can play into these expectations by tailoring pricing to loyalty membership status and past spending — achieving what is, in effect, personalized pricing based on past interactions with the merchant brand.

Kibo merchant Cost Plus World Market transparently displays loyalty perks in stores, including on shelf labels, where member pricing is listed alongside regular pricing when applicable. Special member discounts are displayed in relevant aisles, such as 10 percent volume discount wine purchases.

How are you using new pricing technologies to remain competitive — without breaking the bank?