More and more e-commerce players use dynamic pricing to automate pricing to grow sales and contribution margin. This leads to frequent price changes on their entire stock with some products even getting repriced multiple times a day. For physical stores, the process of printing and changing a single price tag in a physical store takes several minutes and physical stores carry many thousands of products.
How then can omnichannel retailers keep up with pure e-commerce players, for whom changing prices is a completely digital event taking at most milliseconds, and therefore are changing their prices multiple times per day?
This is a question we often get from omnichannel clients and omnichannel retailers considering implementing dynamic pricing. In our many years of experience in implementing dynamic pricing at omnichannel retailers, we have learned that dynamic pricing for omnichannel retailers is certainly possible. We present an action plan for implementing dynamic pricing, ranging from tips to create political momentum in often quite traditional retail organizations to technical considerations, such as electronic shelf labels
Step 1: Building the business case for dynamic pricing
Before e-commerce, retailers had to operate under the “shelf space is limited” constraint. E-commerce has introduced virtually unlimited shelf space: they are only limited by the size of their warehouse. Drop-shipment even removes that constraint. Many omnichannel retailers have also grasped this opportunity provided by e-commerce. They have a core product assortment which is carried both online and in physical stores, but they also have a considerable web-only products.
For omnichannel retailers we, therefore, recommend a pilot period during which dynamic pricing is used solely for the web-only products. This provides them with a solid business case to prove to management that dynamic pricing also has a huge impact on sales and contribution margin at their retail format, not just for Amazon.
If an omnichannel retailer does not have web-only assortment, it could decide to run a pilot on a subset of the omnichannel assortment that is so limited that it doesn’t have a significant impact on store operations. In that case, it is still crucial to make sure that the stores are aware of the importance of the pilot and to make sure store execution is optimal. This prevents the risk of drawing the conclusion that dynamic pricing does not have an impact while it was caused by poor store execution.
If both alternatives for the pilots are not possible, omnichannel retailers could use the 10-20% average contribution margin increase that Omnia Dynamic Pricing users see as input for their calculations. It should be noted that there is huge difference in the performance of a well implemented value-based dynamic pricing system and a poorly implemented rule-based dynamic pricing system. The latter can even be margin eroding.
Step 2: Store rollout by electronic shelf labels or reduced frequency of changes
Once the business case has been established, the omnichannel retailer needs to plan a roll-out for their entire range of products. The retailer needs to make an important decision at this point on whether to implement electronic shelf labels (ESLs).
Over the last couple of years there have been great improvements in performance of electronic shelf labels, mainly driven by e-ink technology, and costs are continuously decreasing. Several providers of digital shelf strips are sesimagotag, Pricer, and Displaydata. Considering an average store carries thousands of products, electronic shelf labels will still be a significant investment. Typical payback periods of ESLs are 18-24 months.
It is, however, important to stress that the impact of dynamic pricing is not just driven by “smarter price points” but also by increased frequency of price changes. Electronic shelf labels help to increase frequency of price changes and thereby returns on dynamic pricing. Some omnichannel retailers decide on a middle ground, implementing electronic shelf labels only for fast moving products with a high frequency of price changes.
The route of implementing electronic shelf labels primarily has technical challenges, however. The ESLs need to be placed in the stores, there needs to be a communication network and the system needs to connect with the retailers' ERP system. From the perspective of this article, it is, however, the most straightforward implementation as – after implementation – the retailer has complete flexibility in frequency of price changes.
If the business case for implementing ESLs does not (yet) seem feasible, the retailer needs to take a different approach. The retailer first needs to decide whether to couple the frequency of online and offline price changes. The advantage of coupling the frequency of price changes is that there can never be price differences between online and offline purchases, which is of course an important consideration for omnichannel retailers.
However, in this approach the retailer does not exploit the ability to have as high a frequency of price changes in its webshops as its e-commerce rivals. This would make the retailer competitive on all online touch points where shoppers carry out their research, such as Google Shopping and comparison shopping engines.
An alternative approach for the retailer therefore could be to have a (much) higher frequency of price changes online than in the physical stores. We would recommend retailers taking this approach to have the policy that – when shoppers note a price difference between online and offline – they always get the lowest advertised price.
In any case, the retailer will have to operate with a relatively low frequency of price changes in the physical stores. Most of our clients start with once a week. Once store operations get used to the new process, this could be increased; for example to twice a week.
We believe the approach without electronic shelf labels to be an intermediary option, which of course is still a great improvement versus not doing dynamic pricing as omnichannel retailer. Ultimately, we expect all omnichannel retailers to fully adopt ESLs. The shift to online orientation for products, increases in frequency of price changes and developments in ESL technology will accelerate this trend.
What are your thoughts on (implementing) dynamic pricing in physical stores? Please let us know!