Pressured by Amazon, retailers are experimenting with dynamic pricing

Dynamic pricing is a symptom of the physical retail era being squeezed by online competition. To stay competitive, retailers like Target, Walmart and Kohl’s are tweaking costs of products on a regular basis, mainly online and in mobile apps.

Amazon, of course, has blazed the trail, with its algorithms that reportedly change prices million of times per day depending on demand. According to Amazon’s website, prices for items can change — even after the customer has clicked “add to cart” — and Amazon can lower prices as part of promotions. Amazon can lower these prices even further to match any price at another retailer that undercuts an Amazon price for the same product. According to some reports, factors that influence prices on Amazon, include demand, customer intent and pricing patterns from other retailers. According to Amazon, its retail prices change based on the company meeting or beating the lowest competitive price from other retailers, and fluctuate throughout the day. The company also said sellers set their own prices according to Amazon policies, and that it doesn’t use surge pricing, or pricing based on region or delivery location.

Vendors who work with retail brands on pricing strategies, including Engage3, Profectus, and Revtrax, say the industry’s major players are experimenting with dynamic pricing in response. (A half-dozen retailers, contacted by Digiday, did not respond to requests for comment.)

The driving force: Keeping prices consistent across all channels means a retailer could fall behind e-commerce competitors, which can adeptly target prospective customers through pricing based on their intent and behavior. Retailers are experimenting with dynamic pricing based on a range of objectives: acquisition, retention, and winning business away from competitors.

“In the 1970s, most retailers had national pricing,” said Ken Ouimet, CEO of Engage3, a software company that works with retailers on pricing strategies. “Today, pricing is much more localized; dynamic pricing lets you segment with time, and it’s not only about dynamic pricing but personalized pricing — the price will be different for every buyer, and the discounts will be different.”

A “race to the bottom”
Ouimet said brands are at different stages of implementation. A recent report found that Target offered different prices on its app depending on if customers were located inside or outside of the retailer’s physical locations; Walmart-owned Jet.com’s “real-time savings engine” drops prices as customers buy more goods.

“Retailers are competing with Amazon with eyes wide open; they realize it’s a different game — in 15 minutes a price can be old and it’s usually based on competition,” said Ouimet. “You can’t fight that pricing is becoming more localized, more dynamic and personalized — in five to 10 years, everything you buy will be based on personalized offers.”

Walmart had to “change its religion” of everyday low prices for dynamic pricing to compete with Amazon, he added. While retailers recognize that dynamic pricing is necessary to stay competitive, it comes with the risk of undermining customer trust due to perceptions of price gouging or price discrimination. Target recently faced a backlash because the prices of products in stores were higher than they showed in the app. As a result, it decided to specify within the app which prices were online versus in-store. On top of customer criticism, altering prices frequently can lead to a “race to the bottom” price war, eroding margins.

In response, retailers are trying to find ways to implement dynamic pricing while minimizing the erosion of customer trust that might result from it. A strategy to drop prices based on Amazon’s pricing patterns is a losing proposition, given Amazon’s ability to undercut traditional retailers on price, said Aloke Mondkar, CEO of Chicago-based pricing solutions firm Profectus and a former pricing analyst for Sears, Best Buy and Winn-Dixie supermarkets. He said one retailer he worked with experimented with lowering online prices several times a day, but it was a futile effort because Amazon was consistently undercutting the company on price.

“We took about 1,000 important SKUs and we moved the price up and down,” he said. “Amazon was still 3 percent cheaper — the fact is, we were waging a price war that we were losing.” A way around this, he said, was to institute a price-matching guarantee with competitors, thereby protecting the retailer from margin pressure of a price war.

Smarter strategy
For a dynamic pricing strategy to be effective, Mondkar said retailers ought to think of it as a means to an objective. For example, they could lower in-store prices if they want to drive in-store traffic, or they may offer discounts to customers they’re targeting who are likely to purchase an item.

“Retailers should look at this more strategically — what are my customers telling me? Is this aligned with what my customers are willing to accept? Is it relevant to the business I’m in?” he said.

By contrast, Mondkar said, Target’s recent moves to raise in-app prices inside stores seemed to run counter to that approach. “Why would you raise prices for customers in the stores?” he said.  “If you would want them to convert, you would want to lower the prices in-store.”

Retailers, in implementing dynamic pricing, are walking a tightrope between the need to protect margins, compete with others, and retain customer trust. They also face legal action from customers if they perceive to be victims of price discrimination since many states have enacted laws prohibiting differential pricing between localities. The laws represent a “grey area,”  but damage to the brand among consumers is a greater risk, said Neil Suanders, managing director of GlobalData Retail.

“If it’s technologically feasible, that doesn’t mean it’s socially desirable,” he said. “It works well if no one knows you’re doing it. Once someone finds out, it creates a storm.”

Beyond legal action, what’s likely worse is the loss of confidence in the retailer’s ability to protect the best interests of customers; a price-match guarantee with competitors can give customers additional comfort. But initiating a price-match guarantee against online-offline price discrepancies within the same brand, as Target has done, puts undue pressure on the consumer, he said.

Another way retailers can get around perception is allowing for dynamic discounting, which offers personalized discounts depending on what the brand knows about the consumer.

“The psychology is very different — we’re still all getting a deal,” said Jonathan Treiber, CEO of pricing analytics firm Revtrax, which has retail clients. “There can be a bigger discount for people who haven’t purchased [an item before] — marketers want to offer the least amount of discounts to as many people as possible.”