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The price is right

You’ve probably already noticed that prices for online products fluctuate considerably. Amazon alone has an estimated 2.5 to 3 million price changes, every single day! Dynamic price management has been causing a stir for quite some time, and is currently one of the hottest topics in retail: while long since a daily occurrence in online commerce, it can also be effectively implemented in brick-and-mortar stores through the introduction of electronic price tags. This creates entirely new possibilities, especially in the extremely price-sensitive apparel industry, but how do you determine the right price? How does the merchandising process change? And the most important question: How will customers react to this?

Let us first begin with a clear definition of the terminology: dynamic pricing is the intelligent adjustment of retail prices to current market conditions. Algorithms analyze a huge amount of data to determine the most effective prices, and factors such as competitors’ prices, weather, time of day, or even inventory can be taken into account. Similar to the recipes of Coca-Cola, Maggi, or Nutella, the selected pricing factors and their interactions are among the best kept secrets of many retail companies.

The prerequisite for a dynamic pricing implementation is the use of modern pricing tools. Anticipating instead of reacting is key, resulting in existing merchandising structures and processes being broken down. The entire process of in-season-pricing becomes controlled by means of exception management, rendering elaborate and time-intensive meetings obsolete, as smart dashboards help decision-makers quickly identify deviations and outliers and thus take appropriate action. As before, retailers can obviously still intervene to help the algorithms make decisions, should they ever require a human touch.

Although at first glance it may not appear so, at the center of dynamic pricing remains as ever the customer: in the end, it is about determining a fair market price for goods, as measured by the customer’s price sensitivity. And in a volatile market with constantly changing product lines, this may change by the minute. Consequently, the fair market price can only be a dynamic one. The phenomenon is by no means new, as supply and demand have always determined the price, yet new is the speed by which the price adjustment takes place.

The long-term effects of dynamic pricing on customer behavior are still largely unknown, but the fact remains that dynamic prices have taught us to wait: maybe a flight or a hotel might be a bit cheaper in the future, or perhaps the price of gas could fall even further. While there are several studies showing that a dynamic adjustment of prices is accepted, whether consumers can still correctly assess the value of products which constantly change in price remains to be seen. In most cases, dynamic prices are to a customer’s benefit, as they tend to come in the form of discounts, and it even gives customers a chance to bargain a bit, as different sellers may try to undercut each other. Especially in online shopping, the prices of other retailers are often just a click away, and can be easily compared, making the Internet one of the most transparent marketplaces in history. More difficult to justify is personalized pricing based on consumer data. From a legal point of view, this may not be forbidden, but it comes with the risk of losing the most important asset of any retailer – consumer trust! Sellers who are dealing with dynamic pricing should therefore follow clear guidelines and ensure transparent pricing, as there is one thing all customers have in common, no matter where they shop, how they shop, or what income they have: a desire for fair treatment.

In any case, the trend is clear: dynamic prices are on the rise. Today, more than 40% of all online retailers already rely on dynamic pricing, and in the medium term, this figure will only continue to rise as firms increasingly use big-data analysis to drive profits. The bottom line is a dynamic pricing system for every retailer, as there is simply no alternative in the long run: retailers who reject this trend will sooner or later experience competitive disadvantages versus those who accept it. Consequently, companies should examine the costs & benefits involved and decide which individual elements of dynamic pricing are economically viable for them, and which they can do without. Ultimately, the key question is not whether dynamic pricing will become a necessity, but when.

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Patrick Brüns
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