According to a recent study by Credit Suisse, more than 8,600 brick-and-mortar retail stores were closed in 2017. Mainly, this is due to the many competitive advantages that e-commerce vendors possess, namely due to more sophisticated pricing from E-tailers. Robert Dolan, Marketing Professor at Harvard University, who studies the algorithms used by E-tailers, describes these algorithms as more sophisticated than anyone could have predicted:
"The price of a can of soda in a vending machine can now vary with the temperature outside. The price of the headphones Google recommends may depend on how budget-conscious your web history shows you to be, one study found. For shoppers, that means price -- not the one offered to you right now, but the one offered to you 20 minutes from now, or the one offered to me, or to your neighbor -- may become an increasingly unknowable thing. Many moons ago, there used to be one price for something; Now the simplest of questions -- what’s the true price of pumpkin-pie spice? -- is subject to a Heisenberg level of uncertainty."
It is an indisputable fact that E-tailers do, indeed, have unique opportunities to individualize prices for each customer, also due to legal differences, and despite some retailers such as Migros in Switzerland are experimenting with personalized pricing, a similar level of individualization is not attainable for brick-and-mortar retailers. However, there are many parts of the dynamic pricing algorithms that can be used by brick-and-mortar retailers, too.
Flexibility is Key
One of the most important steps to dynamic pricing is increasing price flexibility; that is, one's ability to change prices at a very low cost. For an e-tailer, this cost is almost zero, but for retailers with price labels and catalogues, changing the price of a product every day is very impractical and expensive.
According to a study from Profitero, Amazon changes their prices 2.5 million times daily, while Walmart would change only 50,000 prices per month.
However, electronic price labels allow brick-and-mortar retailers to change prices much more often than they used to. Yet, we do not see a similar level of sophistication, and many retailers, even giant supermarket chains, have not yet invested in electronic labels. And those that have, do not use them as efficiently as they could.
Dynamic pricing practices are not yet embedded in the brick-and-mortar retail sector's pricing strategies, both due to lack of integration with IT systems and lack of expertise. While E-tailers have been doing it since day one, it is a relatively new phenomenon in the brick-and-mortar sector, where electronic price labels used to be so expensive that only few could afford them. But the payoff is undeniable, even though it may not be as high as for E-tailers. They may not have data on the individual customer's web history, but they can anticipate buying behaviour and willingness to pay for different products given different factors such as weather, holiday seasons, time of day, and whether the local football team has a big game coming up.
Implementing electronic labelling systems and using these labels to maximize profits without reducing sales significantly can give an enormous competitive advantage for brick-and-mortar retailers, and are becoming increasingly important if you want to stay in business.