«Customers have to get used to changing rates.»

Dynamic pricing promises higher margins, the optimization of online campaigns and increasing profits. But what are the disadvantages of dynamic pricing and what about retailers who are resisting the trend? Patrick Petzold, CEO of UFirst Group, speaks out in this interview for the UFirst Group blog.

Patrick, fixed prices are water under the bridge; nowadays online retailers monitor the prices of their competitors dynamically and in real time. How does dynamic pricing work?

The term dynamic pricing is a little misleading, because it describes rather the system to a market analysis. Where does my product and price stand in the market, and compared to my competitors? This is the question the system answers. It uses the purchase and sale price, the specified minimum and maximum margin, the price and product from competitors, and the conversion rate as a scale to capture the market position of the retailer. When using the term “dynamically”, it is important to distinguish whether the system takes over the automatic adjustment of prices after proposing them or whether the product manager implements the prices manually himself. “Dynamic” in this sense refers to the intermediate step between the basic pricing strategy and the automatic adjustment of prices by the system.

What can retailers expect from a dynamic pricing strategy?

The system recognizes price changes in the market in real time. It then informs you if your conversion rate is rising or falling, and adjusts the price accordingly and automatically in real time if set in automation mode as specified above. A person may have the ability to monitor 80 products, the system several thousand. The software reacts to irregularities; if the conversion rate is too high, it might mean that the product is being sold under price. The system would in this case adjust the price upward, until the conversion rate is stagnating again. This corresponds to the ideal price in the current market situation. The system is also able to detect if other retailers are sold out. In this case, the product prices would automatically be adjusted upwards. The software offers an automated pricing strategy for each individual product - not only on one whole category or product group. This is an enormous advantage over usual monitoring strategies.

What remains in the retailer’s monitoring area?

The software takes over the whole market analysis. Whether the price adjustments the system proposes will be adjusted directly and automatically via the system or whether the retailer will adjust the price himself is up to the customer. If he is an online pure player, he will probably leave the price adjustment to the system. But a company which advertises its products via printed media as well will behave less dynamically. The advantage for retailers in general lies in the functionality; they can stop their online campaign immediately if they see it is not working. Merchandisers who work with printed media, however, also profit from the pricing intelligence system; they are able to verify up until the last minute if the prices with which they go into the expensive print production are meeting market needs.

What are the disadvantages of dynamic pricing?

The disadvantage lies in the less clear communication of prices and discounts. As prices are dynamic and vary continuously it gets more difficult to create a communication solely around them. In addition, the campaign creation also gets more complex. It will be more difficult to create transparency and trust towards the customer. They are used to dynamic prices in marketplaces such as Amazon and Ricardo, or from the tourism sector and airlines in general. There, the real-time pricing has long been a reality. It is important for retailers to communicate their dynamic pricing strategy in a transparent way. In the end it is also in favor of customers--for example, when the dynamic pricing strategy allows retailers to operate more profitably and assess risks better. This could lead to a reduction of the entire price range, which is positive for the customer in the end.

Does the retailer give up his pricing strategy completely out of hand?

The retailers have their pricing more under control than before, because it is still them defining their own prices. Additionally, they have a bigger market overview with the pricing engine. Previously, they were more reactionary in determining if their prices match the market needs, and in checking their overall conversion rate. With several thousand products, this is far too high a burden for employees.

For which companies is dynamic pricing suitable?

Real time pricing is suitable for the entire retail sector and for retailers who have frequent product changes. This is the case in electronics, textiles, or in the food industry. In the electronic market, products become obsolete very quickly because of new inventions. In the textile industry, most products are seasonal; and in the food industry, products spoil fast. This implies that retailers can only use their optimal price for a short period of time. Dynamic pricing here helps retailers to optimize their range of products as well.

We have all heard of dynamic pricing being used in online shops. How does it stand when it comes to local shops?

There are already a few attempts to enter commercial premises in local stores in order to replace classic pricing mechanisms with digital ones, as the example of retailers like Mediamarkt¹ or Saturn² shows.

What is the forecast you give online retailers who resist dynamic pricing

The pressure on the retail sector is great, because of retailers needing to meet their margins. The closer a retailer is to the market development, the longer is his chance of survival. Therefore it is just a matter of time before retailers opt for a dynamic pricing strategy. In order to survive long-term without dynamic pricing retailers have to have either occupied a good niche, or have the ability to beat their competitors when it comes to customer service. However, if other merchandisers are upgrading, the pressure towards dynamic pricing will get too high.