The new dynamics of retail pricing
Authored by: Anastasia Laska, VP Partner Alliances & Business Development, EMEA, Revionics, an Aptos company
No one likes a price war, where even the winner accepts that they are trading (hopefully) short term profit for market share, but, in grocery, they have been part of the competitive landscape for more than 50 years, and are clearly here to stay. In this piece, Revionics
outline the benefits of dynamic retail pricing.
As Russian retailers enter yet another round of price slashing in the run up to the New Year, with all the unpredictable factors of 2020 still in the background, it is worth asking whether there are better ways to fight the battle and hold onto margin, customers and brand equity. These three elements are too precious to sacrifice on the altar of cross the board cuts, when there is a more intelligent way to managing prices, now supported by data science.
And it’s not even that simple. As said, the year 2020 has been most probably the most complex ever in terms of the volatility of all business components: extremely fluid consumer demand as a result of COVID-19 developments, shifts between channels and formats, increasing operational costs and risks, changes in the supplier base and costs levels, currency exchange rate developments, to name a few.
Grocery retailers clearly have a delicate balancing act to perform to protect margin, customer perception and brand equity, particularly now that they are all under threat.
Our recommended solution is dynamic retail pricing, a method of applying the most profitable as well as attractive prices to every product based on their elasticity, which is an equation for raising or lowering prices based on customer perception of what is fair and non-arbitrary.
Dynamic pricing has had a bad rap because it got linked to surge pricing, a method to raise prices at a time of high-demand, as we are experiencing once again as lockdowns start again. Its reputation has not been helped lately as customers see prices for face masks, certain medicines and some food items going through the roof because of peaking demand.
However, it is important first to consider that dynamic pricing has been around in retail and other markets for a while, not least airlines and car rental, and is now well understood by consumers for whom price is now more transparent with the rise of the Internet.
Moreover, the complex nature of competition now, in every channels and sector, has grown so dramatically that dynamic market responsiveness is simply a must-have, whether you are a brick-and-mortar grocer or a consumer electronics pure player.
Dynamic retail pricing is simply the ability to systematically make faster, smarter and more informed price changes using data science, guided by business rules. Optimizing those prices is based on an understanding of each item’s price elasticity as well as other demand signals to drive price changes at the right time, be it daily, weekly or in real or near-real time.
The triggers to make changes are any external signal such as a change in consumer demand or price sensitivity, a competitor’s price changes or other more personal factor that the retailer is tracking based on their particular position in their market.
For some retailers ‘dynamic’ might mean moving from once a month pricing to once a week pricing, and for some – from daily to intraday. Omnichannel retailers by contrast need to consider cross channel influences, both inside and outside of the business.
Other variables to respond to are within category, based on the influence of online competition; competitive price elasticity analysis would help to determine the right set of influencing competitors and, therefore, the right frequency in each category.
Coming down to article level, generally more price elastic articles demand higher price change frequency, so an item strategy analysis can help here to be more precise. And lastly, seasonality; category and article behavior can change between the seasons, and data science can guide here as well, to understand seasonal changes of an article/category’s price elasticity.
In the shadow of renewed price wars, it is worth keeping a laser focus on the customer and implementing dynamic pricing processes that enable a fast response to trends. For instance, tech-savvy shoppers will increasingly expect to receive the kind of highly targeted offers they enjoy online in physical stores. Being able to base retail pricing and promotions on real-time dynamic pricing solutions, and automating the distribution of updates to the shelf-edge, enables retailers with stores to price with flexibility and speed, reacting dynamically to the competition and always offering a fair price to shoppers. Such agility will be critical at a time when the phrase ‘survival of the swiftest’ could have been coined to describe the fast-moving and data-driven world that retail has become.
It’s also important to take into account that a dynamic pricing retail strategy has to be supported by in-store infrastructure, because it is not reasonable to have dedicated human recourses responsible for event-based paper price tag changes to be compliant with law regulations on POS terminals. For cases like that, most of the leading retailers have started to use Electronic Shelf Label (ESL) technology which makes the ability to change prices both seamless and cost efficient.
Based on information from Smart Price (partner of SES-imagotag – the leading worldwide ESL provider): real business cases from key Russian retailers who use electronic price label technology achieved a 1-2 p.p. additional margin increase only because they have this technology in place. In addition, dynamic pricing and electronic shelf labels deliver a synergy effect which result in an additional 1-2 p.p. margin increase compared to using each of these technologies alone.