Tailoring Costs to Customers
When booking a holiday or a train ticket, it’s now normal to see prices fluctuate. However, in most online and bricks and mortar outlets, it’s unusual for price tags to change. You certainly wouldn’t expect to pay a different amount than somebody else for the same item. . . but this could all be about to change. Enter dynamic pricing, the flexible pricing system that tailors the cost of goods to the ability of the buyer to purchase them and the current state of the market. Dynamic pricing, also known as surge pricing, isn’t a new concept. In fact, 200 years ago, it was a universal strategy. But why are retailers turning away from fixed pricing, and how are they using technology to bring this historic trading model into the 21st century?
Before the invention of set pricing in the 19th century, shopkeepers and customers haggled to find a subjective figure. If a richly dressed customer walked into a shop or browsed a market stall, they could expect to pay considerably more than a less affluent buyer. If you were a loyal customer, you were more likely to be given discounts. The introduction of fixed prices brought more structure as well as more freedom to retail, allowing shoppers to browse without requiring the input of staff. Now that retailers have access to so much data about individual shopping habits, dynamic pricing is re-emerging. Personalised, targeted marketing is allowing businesses to revert to the original model, but without the guesswork. Today, a company can find out what you’ve bought in the past, what you’re likely to need, where you might go to get it, and most importantly, how much you’re willing to pay. In 2012, an investigation by the Wall Street Journal found that online companies showed different prices based on personal metrics. But what if this started happening in physical shops, too?
How will dynamic pricing disrupt retail?
Dynamic pricing fully supports the ongoing trends of personalisation and customisation in retail. Consumers now expect to have their specific needs catered for, but what they might not envisage is spending less or more than someone else for the same thing. Despite seeming prejudiced, valuation change can be beneficial to customers and companies. A regular shopper could be rewarded for their loyalty, contributing to improved CRM. It’s also a way to maximise profit for businesses as it matches supply with demand, and avoids undercharging. This works both ways – instead of overpricing items, retailers will be able to offer more competitive figures, which is obviously a good thing for their customers. But although there are real benefits to dynamic pricing, many retail businesses would be completely unsuited to it. Bargain stores like Poundland, for example, wouldn’t support a flexible pricing model because their strategy supports a single fixed rate. Even retail giants would have a hard time setting up the necessary infrastructure. The majority of UK shops use paper tags but of course electronic price tags could be the answer, taking into account changing market prices and adjusting themselves automatically. This, in turn, could combat ‘showrooming’, whereby consumers browse physical stores before searching for a better offer online. Physical shops would therefore become far more competitive with online retail, closing the divide between digital and bricks and mortar sales. Fixed prices are unlikely to disappear altogether, but the rise of electronic tags will certainly disrupt legacy systems.
Dynamic pricing has the potential to rock the retail world by turning a 200 year old model on its head. In physical stores, dynamic pricing has been enabled by electronic price tags. This means that the value of goods is continually updated, reflecting real time market fluctuations. It allows loyal customers to be rewarded and, in future, could take into account consumer’s backgrounds. In many ways this seems fairer, as everybody receives a personalised, subjective service. Even so, customers could also protest against dynamic pricing because they’ve grown used to fixed values. In order to placate disgruntled buyers, perhaps businesses need to be more transparent about data collection and use. If a customer or client understands why prices have changed, they’ll be more inclined to pay them. Ultimately, it’s up to businesses themselves to decide if the benefits are worth the risks.
Does, or could, your business use dynamic pricing? Can existing infrastructures support flexible prices? Should businesses have to explain how and why they categorise consumers? Comment below with your thoughts.