Give dynamic pricing a break
Late last year who noticed that at certain IKEA stores the company ran a ‘reverse surge pricing’ initiative on umbrellas involving halving their price when it rained?
It certainly didn’t garner anything like the column inches that other dynamic pricing activity has achieved. Consider the recent Bank of England (BoE) statement suggesting 31% of companies in the UK plan to use tools for dynamic pricing in a year’s time, compared with 21% currently. It led to hysteria in the national press, with The Sun and other publications going wild over the potential for surge pricing to become rampant across UK retail.
Subscribe to TRBThis hyberbole is no doubt a result of the very visible roll-out of ESLs (Electronic Shelf Edge labels) that is currently taking place by the major supermarkets – in the UK and globally. These enable prices to be adjusted centrally in seconds as frequently as the supermarkets choose thereby providing a platform for dynamic pricing were it to be implemented.
Not much of it is taking place in reality though. Retailers are terrified to admit to doing it because they know they will be castigated by the media. This state of affairs is ridiculous because in the retail sector dynamic pricing is invariably not about increasing prices but quite the opposite – decreasing them.
In a study by The University of Texas at Austin it was found that temporary price increases (surges) affected only 0.005% of products in-store on an average date before ESL adoption and this increased by a tiny 0.0006 percentage points after ESLs were introduced.
The opportunity to use dynamic pricing to clear out perishable goods and reduce waste is obvious. Bakery goods are undoubtedly ground zero for implementing the technology. How many people buy full-price croissants at 4pm in the afternoon in a supermarket? No one does unless desperate, so if they are not discounted it is likely they will sadly be heading for the bin.
Reducing waste is one upside of dynamic pricing and the IKEA initiative highlights how it can also be used as a promotional tool. The umbrellas were likely treated as a loss leader, with the company sacrificing some margin on them but the promotion drove footfall into the company’s stores and undoubtedly gave a very positive feeling towards the retailer from those customers who were able to stay dry.
If IKEA had boosted prices of its umbrellas when it rained then the reverse would have clearly happened. It is no company’s interest to gouge their customers for a one-off margin gain that will kill any relationship they had with that individual.
But for now the naysayers have the upper-hand because the negative narrative makes for better headlines even if it is based on biased thinking and selective presentation. It was interesting how recent research from HyperFinity highlighted that 65% of UK shoppers dislike dynamic pricing (including 33% who hate it) while also stating that only 4% love it. What about the others that don’t necessarily love it but are still positive about it? That percentage likely spoils the narrative.
At least it was also shown that 18-34-year-olds express some level of support compared with a mere 6% of over-55-year-olds. This is very telling and suggests the younger grouping have a firmer grasp on the opportunities presented by dynamic pricing whereas the older crowd are still stuck in the traditional, less intelligent ways of pricing.
With ESLs, computer vision, and forecasting tools now widely available there are great opportunities for retailers to boost efficiency and offer consumers more competitive prices. They can also improve their chances of hitting their targets on reducing waste. It is, therefore, surely time that dynamic pricing was allowed to come in from the cold – and from the rain if involves IKEA.
