June 16, 2015

Why dynamic pricing is the future of brick-and-mortar retail

Real-time price changes have been used in ecommerce since day one. Now, with today's technology, brick-and-mortar retailers have the same opportunity to optimise their pricing strategies and maximise sales and profit.

Every retailer, whether online or in the high street, has a pricing strategy. This could be based on undercutting the competition, or on offering time-limited discounts. Or maybe the retailer aligns prices with demand and perceived value, rather than unit cost. Whatever the strategy, though, its success is always underpinned by their ability to respond to market conditions and change prices quickly.

As for the actual speed at which this happens, brick-and-mortar retailers currently lag a long way behind their counterparts in ecommerce, and mostly for understandable reasons.

According to 2013 research from Profitero, Walmart makes price changes in its branches around 50,000 times per month. Amazon.com, on the other hand, implements over 2.5 million per day. When physical stores, shelves and labels are part of the equation, it's historically been much tougher for firms to be responsive.

Combine this with the decline in consumer spending power since the recession, as well as the rise of mobile phones as price comparison devices, and it should be obvious that brick-and-mortar retailers are at a major disadvantage when it comes to maximising sales and profit through optimised, reactive pricing strategies. And that's even before we consider the labour costs of manually relabelling products every few days, or the impact of having to throw away unsold stock.

Thanks to new technology, however, physical stores have the opportunity to fight back.

With electronic shelf labels, brick-and-mortar retailers can change prices in real time

The key enabler for brick-and-mortar retailers to implement real-time price changes is the electronic shelf label (ESL). This isn't a recent development, per se - some firms already use epaper and LCD displays to show up-to-date prices, as well as other product information, alongside their stock. But as the affordability of the technology improves, and as retailers start to recognise the competitive advantage it provides, it'll only become more ubiquitous.

Large supermarket chains are perhaps better positioned to improve profitability via ESLs than any other market segment, despite their above-average numbers of stock-keeping units. This is because the technology not only enables them to be more responsive, but also solves many of the problems associated with pricing groceries to deliver maximum profit without undue shrinkage - a major pain point for food retailers.

The cost of stocking produce is influenced by a wide range of both internal and external factors: supplier prices, quality and spoilage, and fuel costs incurred through transit, to name just a few. With an ESL solution, supported by data analytics, retailers can use those parameters to change the customer price in real time and therefore never lose money on a shipment.

Even the weather can turn market conditions on their head. Most supermarkets don't currently have the ability to dynamically change the price of barbecue foods over the course of an unexpected heat wave, contributing to unoptimised profit margins and shrinkage when less pleasant weather returns. But again, ESLs make this possible.

Other advantages of electronic labelling include a dramatic reduction in manual labour costs, as well as the removal of human error from the pricing process. Nothing antagonises the employees of a large supermarket like having to replace labels by hand at the end of every working day, and if this is done inaccurately, it can lead to decreased customer satisfaction and loyalty. Moreover, these labour hours are among the most expensive for the retailer, so there's a direct financial benefit in eliminating them.

These are just a few of the advantages that ESL solutions can offer to brick-and-mortar retailers, and for a handful of early adopters, they're already very much a reality.

The barriers to adoption are coming down, but are you ready?

It's hard to imagine that stakeholders at any level, in a store or chain of any size, would resist the introduction of ESL-enabled dynamic pricing - it's better for management, employees, customers and the environment than today's paper labels. There are, however, other barriers to adoption to consider.

One is cost. But as mentioned previously, ESLs are rapidly becoming more affordable. Some solution providers are even shifting to a service-based delivery model, so retailers can introduce ESLs without the upfront investment - something that makes it very easy to trial the technology without committing to a large-scale deployment. And at the end of the day, a combination of improved profitability and reduced labour costs can ensure that the solution pays for itself pretty quickly. There's measurable money on the table, even for early adopters.

Another, perhaps more significant, barrier to truly dynamic pricing is the integration of ESLs with retailers' existing pricing systems. Much of this legacy technology is slow and not designed to implement price changes more than once per day, or to do this automatically. As such, additional data analytics functionality may be necessary for some
firms to fully take advantage of ESLs and use a wide range of both internal and external factors to optimise their prices.

The sooner that retailers bridge this gap, the faster they'll be able to reap the benefits of reactive, real-time price changes and connect their physical stores to the digital world.

Digital customer experience management in retail

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