Dynamic pricing: The next frontier in customer relationship management?

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Last month, B&Q announced that it had begun testing a new dynamic pricing system that changes the price of products depending on a customer’s profile. Under the scheme, loyal customers that purchase from the retailer often will be rewarded with discounts and special offers whilst less-frequent customers will be offered a different price.

The Wi-Fi connected price tags placed at the edge of the shelves will identify loyal customers by a  chip in their mobile phone that will deliver their loyalty card data and change the price of the item accordingly.

Currently trialling at B&Q’s Castorama stores in France, the retailer is planning to roll-out the scheme to stores in the UK later this year. Ian Cheshire, chief executive of B&Q’s parent company Kingfisher, told the Daily Mail: “We have done various behind-the-scenes tests. It’s all about special offers for individuals where we are looking at bundling offers or giving discounts.”

Cheshire added that the retailer is considering introducing a pricing model similar to that used by airlines, which changes product prices depending on the day of the week and according to demand. It is hoped that offering cheaper prices during off-peak times will help bring shoppers into the store during quiet times.

The B&Q boss said: “We could move to dynamic pricing and mimic the model used by easyJet. Yield management techniques are not new – it’s just they haven’t traditionally been used in retailing.

“Pricing could be adjusted based on time of day. I am on the board of Premier Inn owner Whitbread and when I joined they had two different prices for their hotel rooms – now it’s 10,000. Look at how the airlines work and what you can do online, people are used to that.”

Consumer reaction

But will people get used to seeing this new kind of pricing system on the High Street or will there be a backlash from consumers worried about a new two-tier pricing structure?

Dagmar Klein, strategy director at global marketing and technology agency DigitasLBi, believes that these new electronic price tags may cause confusion amongst customers. “What if a non-eligible customer sees the discounted price because he stands next to a loyal customer in front of the shelf?

Rupert Cook, director of g2 Field Marketing, is also wary of how consumers will take to the proposed new pricing structure. “A move towards real-time is in many ways inevitable and it’s not necessarily a bad thing, but any transition towards more dynamic models of pricing must begin and end with the consumer. While other stores will adopt schemes such as this, if I were a brand I would be slightly wary of pushing consumers further towards price-based decision-making.”

Klein adds: “It is important to allow customers to choose the price they want to pay: whether they collect reward points, hunt for coupons or simply pay the regular price. But if customers need to pay a higher price because a data scientist has estimated their willingness to pay a little more for the same product, it might leave a bad taste in their mouth,” he says.

Honey Kirtley, solution marketing, head of insight and loyalty at The Logic Group, agrees, and warns that unless retailers carefully manage the programme, it is likely to anger customers as they feel excluded from offers and discounts.

“To build a relationship with customers the retailer must build trust and act in a transparent manner. Dynamic pricing has the potential to alienate a segment or demographic of the customer base, through the perception of a two tier pricing structure.”

However, if done right and used in conjunction with targeted couponing, she believes that retailers could more effectively target different societal segments that visit stores at different times of the day.

Kirtley says: “For example a new report from Warwick Business School found that generally older people, young families and the unemployed are likely to shop in the morning, whereas in the afternoon and evening this tends to revert to younger people and workers. By taking this type of approach this could actually have a very positive impact on sales and build customer relationships more effectively through a more targeted approach.”

The rise of the omnichannel customer, shifting seamlessly between digital and traditional channels and often whilst still in the store, is forcing retailers to react and make changes. Heikki Haldre, co-founder and chief executive of virtual fitting room solution company Fits.me, echoes Cook’s sentiment that a move towards-real time technology in-store is inevitable.

“B&Q’s plans reflect the retail priority to invest in innovative in-store technologies in order to engage shoppers and combat the growing showrooming trend. With a number of new technologies hitting the market, from virtual fitting rooms to loyalty cards and personalised offers, the challenge for retailers is deciding which solution is the best investment in order to improve the overall bottom line. For the tech-savvy shopper, a personalised shopping experience is no longer a preference, it’s an expectation – and those retailers that can deliver a vastly improved experience are more likely to see their customers complete purchases immediately rather than watch them wander to a competitor.”

High Street saviour

So can dynamic pricing take the experience that one step further and actually help retailers drive loyalty and boost sales?

Gavin Dein, Founder and CEO of loyalty technology provider Reward, doesn’t think so. “To successfully foster and deliver strong customer loyalty, these programmes must effectively marry several channels – digital, transactional and in-store – to deliver tailored deals and promotions that drive a customer back to the shop floor for repeat purchases.

“This new pricing system doesn’t achieve this. It lacks the sophistication to develop a strong, personal relationship with the consumer. It is hopeful rather than tactical – simply implementing a quirky way of giving a customer, that is already in the store and likely to purchase anyway, a discount in the hope that once they leave they will choose to return.”

He adds that other retailers will be watching from the side lines of the success of the scheme before implementing dynamic pricing programmes themselves. And, even if it can develop demonstrable sales growth and ROI, Dein doubts whether dynamic pricing will come to be favoured over other emerging loyalty schemes, such as card-linked offers.

Cook is also doubtful, claiming that the scheme could actually be “detrimental” to the High Street. He says: “The experience of shopping is the USP that makes the high street so important to the retail industry. In a highly competitive marketplace, brands need to be doing everything they can to create separation between themselves and their rivals, particularly in large multiple, superstore retailers. This means taking a core message and delivering it right the way through the line.”

Kirtley, however, has a much more optimistic view of the future of dynamic pricing: “It is already commonplace for High Street retailers to offer customers price discounts on products at peak times. Dynamic pricing however, when coupled with aligned targeted offers and a cohesive multi- channel strategy that encompasses online, mobile and in- store, does have the potential to boost sales and improve campaign ROI. When managed correctly it can also enable retailers to provide a more personal and unique experience during more challenging times.”

Do you think retailers risk alienating consumers with dynamic pricing or do you think it could help save the High Street?

About Natalie Steers

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25th Nov 2013 12:52

My regular use of a shop should be recognised and rewarded , but not through individual item pricing. Sure if the shop has my purchase history and I have agreed to download and use its app letting me know that there is a special offer on something I bought before, that might lead me to add a couple of items to my basket. Of more importance to me would be long term recognition where my complete basket of products gets a personalised discount at the foot of the bill. Much simpler I would have thought. 

However I admit to being more of an on-line shopper, so what do I know!

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25th Nov 2013 20:29

This is an interesting concept.   However I am concerned about some of the implications of such a technology.   What if the price of the product was dependent upon other choices known to have been made that reside in the archives of buyer information housed in corporate  databases.   What if, a seller decided (or was cajoled by government) to charge more for medications because  it also knew that the consumer purchased high fat or sugary foods?   

What if, the seller's personal sentiments about race and lifestyle influenced what prices people had to pay?   Would this engender loyalty or be a subtle means of discrimination.  

This technology is designed to extract the highest amount of consumer surplus without having to demonstrate that pricing decisions are reflecting different market characteristics.

 

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25th Nov 2013 20:38

From a customers perspective dynamic pricing risks being seen as a solution looking for a problem to solve. 

My very simple rule of introducing technology into retail is to only implement it if it makes things better and easier for customers. I have not heard anyone make a convincing customer case for dynamic so far but I'd love to hear it.

 

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