Features, Strategy & Operations

Retailings Game Show Pricing

Warren Buffet always said, “Price is what you pay. Value is what you get.”

That may be true in the rarified atmosphere of mergers, acquisitions and stock trades. But with all due respect to the Oracle of Omaha, getting down and dirty in the retail trenches is becoming more like a game show that’s somewhere between “The Price is Right” and “Let’s Make a Deal.”

Doing the Math

The culprit here is dynamic pricing, also called surge pricing, demand pricing or time pricing. At its core, it’s a flexible pricing strategy based on consumer traffic, demand, weather or even time of day and calculated by using complex mathematical algorithms. At its best, it assures customers they are getting the best prices—especially when compared to the largely static pricing policy or predictable weekly promotions at brick-and-mortar stores.

Explain that to a harried mother of two who just spent the last hour filling her shopping cart for the week and ends up spending 20 percent more than she thought she would. Or finding out that the person in front of you at the register paid $100 less than you for the same Burberry leather jacket.

These may be extreme, even unreasonable examples of rapid-fire price changes that could throw retailing into a tailspin and confuse customers who will not only have to determine where to shop—but when!

Does this mean that the price tag invented by John Wanamaker over 150 years ago to eliminate uncouth haggling in his store is doomed to obsolescence? And are we seeing the retail world moving toward an auction without end?

Before you start frothing at the mouth, or cash register, let’s understand this practice can be traced back thousands of years to the souks of the Middle East and North Africa where merchants changed prices a dozen times before you got past
their booths.

Seeing the Light

Moving to modern times, we all remember Kmart’s Blue Light specials that had customers running to buy items before the price changed. How’d that work out for them? And can you remember a time when sports venues didn’t price tickets based on day of the week and sometimes where a team was in the standings, who was pitching that night or the popularity of the opposing team.

Where would the airlines have been without Super Saver fares or Priceline.com without setting prices for flights and hotel rooms based on inventory and demand data. Think about how pissed off you are when you find out that the person sitting next to you in those ever-narrowing coach seats paid significantly less than you did.

Frankly, the Magic Kingdom seems a little less magical with Mickey and Goofy calculating prices based on park attendance and instituting as much as a 20 percent increase on the busiest days. Then of course there’s Uber, the Dark Lord of surge pricing, whose love/hate relationship with customers can go either way.

Even parking meters, the bane of every mobile urbanite and suburbanite, are jumping on the surge pricing bandwagon. And in La La Land tolls on some freeways moved up and down depending on traffic. It gives a new meaning to the term
“road rage!”

On a positive note, where would we all be without the dynamic pricing strategy that led to “Happy Hour” at the local watering hole or the Tuesday afternoon senior citizen price at the multiplex that puts a few butts in the seats during an otherwise dreary time of the week.

Price Mismatching

Overall, dynamic pricing can narrow the gap between online sellers and brick-and-mortar stores. But a word to the wise here. Just because you’re capable of dynamic pricing, don’t get cocky and offer price match guarantees. You can end up shooting yourself in the foot. Price matching requires consumers to do their own shopping research and then take their evidence to the store. It’s not something all shoppers are willing to do. And those who are not may simply buy products online.

I’m all in favor of the price transparency that online shopping brings to the table. But it can get more than a little disconcerting for retailers and customers when companies like Amazon or Walmart.com makes tens of thousands of price changes in the run-up to Christmas.

There are those who believe that dynamic or surge pricing could become more common in retailing year-round as competition, digital and otherwise, intensifies. Perhaps! But at what cost? It might do more to alienate customers than draw them into the warm bosom of brick-and-mortar retailing and make them less loyal than they already are?

We may find out sooner rather than later. The impending merger of Amazon and Whole Foods is likely to result in more dynamic pricing. This will no doubt be an attraction for Amazon’s 82 million Prime members who understand the inequities in standardized pricing, particularly at supermarkets. In other words, why pay the same for fresh product in the afternoon or evening when it’s not as fresh as it was that morning?

However, there are financial practicalities at play. As powerful as Amazon might seem, its marriage to Whole Foods would only give it about four percent of the U.S. grocery market—not enough leverage to strong-arm food manufacturers to lower prices significantly.

Who Pays the Price?

On another level, dynamic pricing can’t be done by hand. It requires widespread use of electronic shelf labels (ESL). But retailers can be major league procrastinators and notoriously stingy when it comes to spending money on new technology and it’s unlikely that manufacturers will jump to pick up the tab. Without ESLs, addressing short-term spikes in prices would be economically unfeasible and virtually impossible to accomplish from a labor standpoint. Online companies have no such issues.

More to the point, ESL’s were designed to give retailers better insight into inventory and greater agility in responding to competitors while offering customers more transparent and consistent pricing and promotions. Using it for rapid-fire surge pricing—especially in grocery—makes it a gimmick. Consumers will see it as stacking the deck in the house’s favor rather than enhancing their shopping trip. It doesn’t assure them they’re getting the best price—just a different one.

Additionally, department and specialty stores are likely incurring the ire of shoppers when online prices fail to match those in store, and vice versa.

While dynamic pricing is still in its infancy and a whole slew of businesses have yet to adopt the auction economy, retail’s success will be measured by whether it can change prices as quickly as its online brethren.

Only then will benefits like higher sales and employee productivity and efficiency outweigh the costs and negative attitudes.

Amazon has already learned this lesson from its physical locations where it no longer displays prices on shelves, enabling them to change prices as quickly as they do online. Of course this doesn’t mean it’s a one-way street. Amazon, or any other retailer, could use dynamic pricing algorithms not only to raise prices but to determine how much consumers may be willing to pay based on their shopping habits and past behaviors.

Some retailers are using surge pricing not to boost revenues but to spread them out and avoid crunch time. In the UK, for example, Marks & Spencer tested dynamic pricing by offering discounted sandwiches early in the day in order to reduce the lunchtime rush.

Economics in Action

Meanwhile the issue of legality has come bubbling to the surface thanks to an FTC investigation—albeit a toothless one—involving Amazon’s purchase of Whole Foods and unsubstantiated allegations of deceptive pricing practices. Macy’s, Sears and Kohl’s have been accused of similar practices.

Dynamic pricing, while appearing unfair to some, is far from illegal. As some academicians have stated, it is simply economic theory in action and the result of a healthy and normal competitive environment in which the price of goods and services automatically adjusts to supply and demand.

Anyone that’s purchased anything from iPhones to Beanie Babies knows that when demand is high and products are in short supply, prices go up. When excitement wanes and product floods the market, prices decline. It’s all about putting supply and demand in equilibrium—or so say economists. However, the entire reason we have economics is to keep economists employed so their conclusions can sometimes be suspect.

The bottom line for retailers is how to convince consumers that dynamic pricing benefits them and is not just a fancy term for price gouging. Any way you look at it, it’s a gamble!

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