How Far Can Dynamic Pricing Go in 2019 — And Where Might It Stumble?

Dynamic pricing promises to keep making strides in 2019, with vendors updating their repricing software (“repricing” is another term for “dynamic pricing”), and online sellers engaging in increasingly fierce competition to win the buy box. But there is danger — the temptation to race to the bottom when it comes to prices — in a race that often has merchants trying to win transactions away from Amazon.

Amazon, in fact, won the online price war over the extended Black Friday holiday shopping season, which ran from Nov. 21 to Nov. 26 ,with products from the eCommerce operator averaging nearly 14 percent lower than competing retailers including Walmart and Target, according to an analysis from Profitero. The analysis was based on the price of “thousands of items” from these five product categories: electronics, appliances, tools and home improvement, video games, and toys and games.

Granted, It’s not the easiest task to determine how much of that win is directly attributable to dynamic pricing. But Amazon has long been a leading practitioner of dynamic pricing, which typically relies on automated software that changes prices based on inventory, competitor moves and other factors. That helps to win over consumers and encourage purchases, especially as shoppers sought the lowest costs for holiday gifts and other items during that five-day period covered by the study.

And the Amazon pricing win during the early part of the 2018 holiday shopping season comes as PYMNTS research shows that the eCommerce operator is commanding more consumer spending. Amazon now accounts for 2.1 percent of all consumer spend — some $1,320 of the total paycheck for a household that earns roughly $63,000 a year ($62,941, to be precise), according to The Amazon Paycheck Index. That’s up from 1.6 percent in 2017.

Marketplace Use

Dynamic pricing promises to keep more consumers shopping on Amazon.

In fact, when it comes to sales conducted via the Amazon marketplace, the use of repricing software is increasing, according to another analysis, this one from Feedvisor. It found that “The use of repricing software increased by sellers (of all sizes), particularly those that sell anywhere between $250K-$2M per year, as they experienced a 15 percent increase versus last year.” The use of such digital retail technology is also increasing among smaller Amazon marketplace sellers — those with less than $250,000 in annual revenue — which shows that “even sellers who are still finding their way on Amazon are using software to highlight and draw out analytics and refine their product offering.”

The goal?

To win the coveted Buy Box and Best Offer positions for marketplace sales. According to information from ChannelAdvisor, 82 percent of sales stem from winning those positions. That’s why vendors keep upgrading their repricing offerings and adding new features, such as tools that determine when a discount might lead to a sale.

The early part of 2019 will bring more clarity about the role of dynamic pricing for online sales during the ongoing holiday season — dynamic pricing and associated features can go a long way toward pulling in last-minute shoppers, as price is usually the most important consideration that leads to a transaction.

More Pricing Changes

But don’t make the mistake of thinking that dynamic pricing is just or mainly about Amazon, even though that company stands as one of the main drivers of retail (and logistical) innovation in the U.S. For instance, earlier in December launched a repricing software product for Walmart online marketplace sales. The size of that marketplace pales in comparison to that of Amazon’s, of course, which opens up the prospect of repricing playing a significant role for Walmart in gaining those online sales.

Online price changes continue to increase in number across the board, a trend that has held since at least 2008, according to a research paper released earlier this year.

In “More Amazon Effects: Online Competition and Pricing Behaviors,” Alberto Cavallo, an associate professor of business administration at Harvard Business School, found that the “the average duration for regular price changes fell from 6.7 months in the period of 2008 to 2010 to only 3.7 months in the period from 2014 to 2017.” You can thank increasingly sophisticated algorithms for much of that, along with the increasingly fierce nature of online retail competition. Price changes are especially rapid in such product categories as household goods and electronics, where Amazon offers much stiffer competition than in some other categories, the research found.

But keeping up with price changes is not the only challenge that practitioners of dynamic pricing will face in 2019. The temptation to “race to the bottom” when it comes to pricing will likely become more acute, given the competition and the sophisticated software that can, depending on how it is calibrated, can make such a journey relatively easy. That race to the bottom can not only ensnare retailers but product manufacturers, as Profitero recently found when it analyzed prices for online beauty products.

Manufacturer Concerns

“A leading beauty manufacturer found itself caught up in this intense price competition, losing valuable margin day by day — until it altered its promotions strategy, leading to an 87 percent bump in sales,” the report said. The antidote to that, at least for the manufacturer? “More carefully selecting the distributors they offered product to and establishing agreements not to resell on Amazon,” Profitero said. “Secondly, they stopped all price deals, like Deal of the Day, on top Amazon products and only ran coupon promotions, which did not trigger race-to-the-bottom price matching across other retailers. Finally, across all retailers they developed a strategy of only offering price discounts on exclusive products.”

Dynamic pricing is growing and spreading to new areas — as reported in PYMNTS, for example, dynamic pricing has produced more than $1 billion in revenue for automakers over the last decade. You can be sure 2019 will bring more advances for that retail technology, and more use cases and best practices. But it pays to heed the ongoing lessons of not racing to the bottom, and figuring out where Amazon and other competitors might end up beating you no matter what.