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Will Dynamic Pricing Improve E-commerce Margins?

Mary visits her favorite housewares e-tailer looking for a new Cuisinart Food Processor to whip up a few killer dishes for her annual New Year’s Eve dinner party extravaganza. She sees a couple of makes and models and starts reading the reviews. She decides on the 8 cup model and is presented a price which is $15 less than another specialty retailer with the same make and model and makes the purchase.

Sue is also in the market for a new Cuisinart Food Processor. She starts her search by going to Google and typing in the make and model that she is looking for. She ends up at the same site that Mary prefers. She’s also presented with a price that is $25 less than other places on the web. She makes the purchase.

Two customers, same e-tailer, two sales, two different prices.  

Why?

Keeping competitive in an e-commerce world means more than just setting the right price; it means knowing how and when to set that right price and for whom. Timing is key, as is knowing the profile of the customer who’s looking at the merchandise. Not surprisingly, there’s an app for that. Or more precisely, dynamic pricing software that data, technology and innovators are using to help retailers establish themselves as price leaders and customer favorites.

Dynamic pricing is not a new concept, airlines have been using it for years. It’s why business travelers who book last minute pay more than leisure travelers who book weeks or months in advance. But like everything that’s moved online, the concept of dynamic pricing has evolved as e-commerce has enabled retailers to respond in real-time to consumer supply and demand across the marketplace. And with an estimated average profit boost of 25 percent, it’s no wonder it’s becoming the next big thing in e-commerce.

Obviously, pricing strategies allow retailers to fluctuate prices based on demand — decreasing prices when there’s a lull to boost sales, and increasing prices to generate profit when sales are thriving — the algorithm gives e-commerce sites the ability to create an automatic competitive pricing strategy on the site. Pricing strategies have taken on more significance, however, by Amazon which has made it its mission to capture as many sales as it possibly can by having the cheapest prices on the web for everything it carries.

“Many retailers opt for pricing intelligence software that has the ability to scan Amazon for thousands of products every 10 minutes, lifting the burden of manually tracking competitors,” an Econsultancy article reported. “Dynamic pricing also provides retailers with additional insights on market trends. Retailers can implement different price levels and observe price elasticities before finding the optimal market price.”

Econsultancy reported that research shows gross margins are increased 10 percent through the use of price optimization software. Just like consumers are sweeping various websites to price compare, retailers are using software to do the same against its competition. As the battle for e-commerce pricing heats up, so will the need for retailers to tap into pricing software technology in order to keep up.

“Online retailers are turning to data to help them compete, and they have strategic price ranges that they play between,” said Meghan Heffernan, a spokeswoman for Savings.com.

And it appears major retailers already have.

“Pricing intelligence software has already caught on as 22 percent of retailers have chosen to implement it. An additional 7 percent plan to start using it within the next six months and 36 percent in the next year,” according to the report.

The article cited a handful of major retailers that use dynamic pricing, which (not surprisingly) includes Amazon, Wal-Mart, Best Buy and Sears. Amazon changes its pricing every 10 minutes, according to the report, which has led to a 27.2 percent increase in sales from 2012-2013 and helped generate more than $44 billion in that time period. Wal-Mart, one of Amazon’s increasingly top pricing competitors, changes its prices around 50,000 times a month, Econsultancy said, which has reportedly lead to a 30 percent increase in global sales that topped Amazon’s numbers. Best Buy and Sears have also seen significant sales boosts (20-25 percent) during times when dynamic pricing was implemented, the article also reported.

“As the e-commerce market becomes increasingly competitive, retailers need to be able to easily monitor their competitors and the market as a whole. Pricing intelligence software and dynamic pricing allow for this and incorporate other factors such as the level of demand and conversion rates,” the article said.

The concept of dynamic pricing strategies translates across industries like hospitality, travel and entertainment. Similarly to how airlines price seats based on demand, retail has found a way to dissect where consumer demand is and what retailers are becoming most attractive, price-wise, particularly on large-ticket items.

“In the retail world, this means a seller can see immediately that Amazon has dropped its price on, say, a big-screen TV, then slash its own price in a matter of seconds. According to research firm 360pi, Amazon and Sears alter their prices for 15 to 20 percent of their online goods at least once a day,” Forbes reported.

Because dynamic pricing is data-driven, responsive to the market and can actually react in real-time, it became one of the hottest retail trends in 2014. Like most analytical data, the average consumer is likely unaware about the strategies companies are executing to manipulate purchasing power over them. Amazon even modifies price based on the consumer’s zip code, recent Google searches and area competitor prices. And then there’s Wal-Mart that recently vowed to match Amazon prices in stores, which is essentially a brick-and-mortar version of dynamic pricing minus the online software.

Outside of the normal competitive shopping strategies, seasonality and holidays play a major role in dynamic pricing models. Those hot ticket items during the holidays? The price is likely to change quickly online based on how many have been bought and how hard the item is to find.

“The most dynamic retailers change prices on 15 to 20 percent of their assortment at least once a day during normal shopping periods,” said Jenn Markey, vice president of marketing at price intelligence firm 360pi. “This can easily double at peak times in key categories like back to school and the holidays.”

Using consumer’s data and search history is nothing new in the retail industry and most sites, like Amazon, are already using your recent searches and Google history to suggest items to buy. Dynamic pricing uses similar software to tap into consumer behavior, and it’s a trend that retailers used during the recent holiday rush. Still, not all retailers are on board with big data driving their pricing strategies. There’s a segment of retailers who simply don’t have the technology or resources to implement the strategy, and then there’s a segment who won’t embrace the technology.

“According to industry insiders and analysts, dynamic pricing, indeed any kind of data-intensive price modification, hasn’t been embraced by clothing retailers,” a FastCompany article reported. “A highly elastic industry that posted over $176 billion in sales in 2014, according to global information group the NPD Company, it’s nevertheless decided to largely sit out the dynamic pricing dance.”

Sucharita Mulpuru, lead e-commerce researcher at Forrester, shared why retailers aren’t warm to the concept of big data dictating business models. For one, it’s about customer trust. Most clothing retailers, for example, have a blanket strategy about when they lower prices or apply discounts and wouldn’t want customers to buy an item at one price only to find it dropped just hours later.

“Retail pricing is governed by a lot of really old, established principals,” said Mulpuru, who doesn’t think retailers always want to apply a scientific calculation to price decisions. “There’s this whole pricing that’s like, ‘cost plus,’ which is basically, companies deciding: We’re going to make a 50 percent margin, and that’s it, regardless or whether your consumer’s willing to pay more for that.”

Not to mention scarcity. High-end retailers, in particular, since the financial crisis have used the concept of scarcity to keep prices high, and not discounted at all. If fashionistas want the “latest,” they’ll have to pay full price or risk not getting it all when it goes on sale.

And, that’s where dynamic pricing strategies may fall short.

Retailers don’t always want to worry about when, where and how to change prices on specific items based on software-driven data. E-commerce already reduces the need to interact with sales associates in physical stores, so what impact will allowing analytics to discriminate prices based on a wide variety of factors have? Pricing mistakes have proven to be costly in this industry when it comes to consumer trust.

Certainly, dynamic pricing strategies can’t be applied everywhere in the retail industry, and savvy consumers are bound to catch on to which retailers are implementing it best and how it advantages them. E-commerce has changed the way consumers shop, and now software innovations like dynamic pricing have changed the way retailers manage customer preferences and margin. Data and technology has intensified competition even further, which leaves one question: What price will it have on consumer preference and retailer margin?

In our hypothetical case, the e-tailer in question hopes it’s quite positive. For Mary and Sue, they both had a great experience, they got what they wanted and got it at a price they both considered a “deal” even though they paid different prices. Mary’s price included a “kicker” for being a loyal customer and wanting to keep her business, a discount that the e-tailer was more than happy to pay to get rid of food processors post-holiday.  Sue’s included a bounty hoping to get her to start her search with them instead of Google next time.

Dynamic pricing worked well in this instance. Whether it leads to a lift in margin and sales, well, only time will tell.

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