I have always been attracted to the challenge of setting prices for products and services. Why? Well mainly because it is probably the most neglected and misunderstood aspect of retail marketing strategy. However things are changing rapidly.
In recent months here in the UK the business and daily press have become obsessed with the concept of “surge pricing”. The term has been portrayed by commentators and journalists as the “latest “in-thing” or “whizz” that shoppers are about to become exposed to. I would like to de-bunk this argument and in this blog I express some observations that hopefully put the concept in perspective and context.
The term apparently describes the notion that retailers are likely to do away with the concept of “fixed pricing”, which has been the practice for many decades. Instead prices will rise and fall in an ever-bewildering number of changes during the day to reflect rises and falls in demand. The reason why it is gaining more traction is built around the confluence of big data and technology: a theme which is a recurring feature of my book and my previous blogs.
However, let’s get real here. Call it what you will – surge pricing, dynamic pricing, peak time pricing or whatever. It has been around for a long time, particularly in the services sector. Most of us have experienced such variations in pricing with airlines and hotels for quite a number of decades. It is particularly appropriate in services, where you cannot store or inventories services. Once the flight takes off (whether at capacity or half-capacity) the opportunity is gone to sell extra seats. We refer to this as one of the consequences of “perishability”.
Of course in traditional retailing, as shoppers, we are constantly exposed to promotional prices, discounts, special offers and so on. However a number of developments have increased the frequency of such strategies and in particular the practice of varying prices in a frequent or dynamic way to reflect demand or the lack thereof.
Companies such as Amazon have taken the practice of dynamic pricing to ever higher levels of sophistication. Again I take you back to the confluence of technology and data. By capturing a raft of information about the individual shopper and by making use of technology to developed detailed algorithms to project and forecast demand, companies can reflect this in the pries that they charge for their products.
This has been further helped by the use of e-pricing within the “bricks and mortar” stores. This has been going on for a number of years in European countries such as Germany and Scandinavia. This is visibly identified by the increasing use of Electronic shelf labels (EPL’s). This has recently entered the lexicon in UK retailing.
Let’s reflect on this development for a second or two.
Traditionally one of the biggest challenges facing retailers was to implement price changes. Paper-based shelf labels had to be changed manually by a vast number of people across the store portfolio. Imagine the length of time it can take to fully implement changes across five hundred store outlets for example? Also reflect on the potential for human error: again a large number of individual doing such a mundane task. There are bound to be errors. Also not every store will work to the same level of expected efficiency when it comes to making the changes. It could potentially take a few days before every store in the portfolio has addressed the changes.
Now reflect on how it is so easy for online retailers to make and implement price changes. What may take a few days in a “bricks and mortar” store can happens within an hour or two of a strategic decision to effect a change in price on a number of different items.
Now, through technological developments, prices can be altered with bewildering frequency across the traditional physical outlets.
Surge pricing, it is argued can lead to higher margins for retailers because it can allow them to reduce waste: in the form of excess stock at the end of each day. This is achieved by altering the price of items to reflect demand patterns and also lead to operational efficiencies by spreading the shopping more evenly during the day.
A good example of this was an experiment by Marks and Spencer in 2016. It reduced prices on its food items up until 11am each day and then increased them during the peak “lunch-time” period (when people call in to buy a sandwich or salad). Petrol stations in Scandinavia have used similar strategies to manage demand by increasing the price of fuel at peak times and reducing it at off-peak periods.
The notion of a “one piece fits all” approach is coming under increasing attack and is seen as being implausible – given the array of data and technology available to retailers.
What are the benefits to shoppers who might be faced with varying prices when visiting their local supermarket or fashion retailer? Well if you are prepared to shop during off-peak hours you would certainly benefit from lower prices. This might mean making a visit to the store at 11am on a Monday morning or 11pm at night.
If retailers go even further and link your personal data and shopping preferences and patterns to a personalised form of pricing, then you may also benefit from lower prices gain some reward through your continued loyalty.
In essence shoppers would have to readjust their shopping habits and this may take some time before they become conditioned to such “surge pricing” tactics. For instance in Scandinavia petrol stations are engaging in such practices by changing prices at different times during the day.
Retailers probably gain more from this exercise. The do so through more effective management of inventory and through achieving cost efficiencies by more effectively managing resources e.g. front-line staff.
It also makes it easier for retailers to make more effective price matching offers and get these changes up more quickly via electronic shelf labels.
In theory it addresses the ever-increasing need for price transparency.
The fact is that UK retailing is only in the nascent stages of implementing the technology when compared to countries such as France. In the latter case retailers there are in a position to changes prices over 90,000 per day if they so desire.
For bricks and mortar retailers it allows them to compete more effectively with pure play online retailers. They can effect price variations potentially as quickly as them, thus reducing the gap between them.
If you are getting cheesed off with the implications for shoppers there is good news, at least in the short term. Retailers, particularly supermarkets, faced with the bewildering range of items and the sheer size of the number of the stores which they operate, are only able to drive changes with such frequency on about 20 per cent of the changes that their computer systems and algorithms recommend.
It will also take time to combine personalised, individual pricing for each and every one of their shoppers.
Once again the combination of technology and data is driving change.
Remember this. The concept of surge pricing is not new. What is innovative is the potential that it offers to retailers. For shoppers, if we wish to benefit from it, we will need to become conditioned to it and adjust our shopping habits accordingly.
Haggling over prices has been around for centuries. To some extent this notion of surge pricing reinforces this practice: shoppers will become used to such variations. The idea of a standard fixed price may disappear. Let’s keep an eye on this development.