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Is dynamic pricing the new reality for retail in new normal?

With the world shifting online since the pandemic, it is easy for consumers to compare and buy online. Be it a soap or something high-value like an electronic, it is to draw a comparison on the internet and then hit buy in just a click. So, finding the lowest price is no more a task, but an easy endevour. Keeping this context in mind, Mckinsey reports that because the shift to e-commerce is expected to continue even in the post-pandemic era, pricing will become an increasingly important competitive tool for retailers. Dynamic pricing, it says, is poised to become one of the core capabilities that sets winners apart in the retail landscape of the future.

What is dynamic pricing?
In easy words, dynamic pricing is the (fully or partially) automated adjustment of prices. This is more the ‘call of the day’ in the travel industry, be it airline tickets, hotel rooms, or ride-sharing services. However, the concept of dynamic pricing is not restricted to e-commerce or the travel sector, even traditional retailers can reap tremendous benefits from merchant-informed, data-driven algorithms that recommend price changes for selected products at some level of frequency.

How can dynamic pricing help with omnichannel retail?
Omnichannel retailers can benefit highly from the concept of dynamic pricing, however, not many has developed this capability. Some are only now starting to explore the potential of dynamic pricing. Other retailers conducted half-hearted and poorly planned pilots that, unsurprisingly, had little impact and thus failed to get the organization’s buy-in. Mckinsey notes that given their experience of working with retailers of varying sizes across the range of subsectors, they’ve identified critical yet often overlooked imperatives and pitfalls that should be top of mind for leadership teams deploying a dynamic-pricing strategy. There’s no one-size-fits-all approach, but close attention to the following dos and don’ts can dramatically boost a retailer’s chances of success.

What can be done to get acquainted with dynamic pricing?
Mckinsey lists out a few things retailers can do to get started on this path. Here’s what to keep in mind. 

  1. Focus on the out-the-door price, not the item price. Shoppers don’t just look at the ticket price of an item they want to buy. Instead, they base their purchase decisions on the total out-the-door price, which includes taxes, shipping costs, service charges, and any additional fees tacked on to the total price. Your dynamic-pricing strategy must therefore reinforce your chosen value proposition. That means making thoughtful choices not just about ticket prices but also about promotions, bundles, personalized offers, and shipping times and fees.
  2. Consider consumer expectations. Certain items are better candidates for frequent price changes than others. In apparel, for example, prices of on-trend fashion items can change from week to week, but prices of basics (such as plain T-shirts or underwear) should generally stay more stable. (Customers who have been buying white crew socks from your stores for years shouldn’t get sticker shock when they come back to buy another pair.) Carefully consider the length of the purchase cycle as well as consumer expectations for each product set. Prices of big-ticket items that tend to be heavily researched by consumers—such as TVs or sofas—should remain relatively stable, since frequent price changes may frustrate the diligent consumer who has been doing research for months.
  3. Test and refine. Dynamic pricing is both art and science, which means that a test-and-learn approach is crucial to getting it right. To manage risk, align with your CFO on a “war kitty” and agree on the direction of price changes during the initial test phases. Start with pilots in just one product category or region. Assume that the first few price moves won’t succeed; establish an approach for tracking progress, measuring the impact, and making quick adjustments. Invest time with merchants during the initial tests and work with them to formulate next steps before transitioning to automated price-change approvals.
  4. Plan your journey. As a foundational step, seek to understand your current competitive position in the market and consumers’ price perceptions of your brand. Then, map out your dynamic-pricing journey. Given most retailers’ starting point, reaching the end-state goal will almost certainly require a phased approach to building and assembling best-in-class data, infrastructure, tools, and talent. Don’t expect to get there overnight. Set and manage internal expectations; demonstrate quick wins to bring the organization along.
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