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Beware the perils of dynamic pricing

The theory
Dynamic pricing is the practice where near identical products are sold to different consumers at different prices. The theory works on the principle that some shoppers are more price sensitive than others, so different people can be charged varying prices. But some instances of dynamic pricing have led to vehement shopper and media condemnation of a practice that lacks both transparency and fairness. As we look towards the future of retail, we ask whether dynamic pricing has a place either now, or in the years to come.

The reality
Today’s consumers are price savvy. But some are more price savvy than others. Using dynamic pricing, a retailer can identify those shoppers who respond keenly to changes in price or who are loyal to promotions. They can then target them with lower prices and offers. Using the same approach, retailers can isolate those who are insensitive to price changes and ensure they are offered full price products and services.

The practice of charging a price premium to a captive market is as old as retailing itself. For instance, if you are operating a theme park, you might charge more for a soft drink in the middle of a queue for a ride than you do in a kiosk. There is a logic to this approach, but given that today’s Connected Consumers are just a few taps away from broadcasting their displeasure via social media, retailers should think carefully before embarking on this opportunist strategy.

In some cases today, shoppers are prepared to pay more for convenience and so accept price differentials between channels. But in the future, consumers simply won’t pay more for a loaf of bread, regardless of whether the identical item is bought in a convenience store around the corner or a superstore 10 kilometers away. As a consequence, retailers and manufacturers are rethinking their approach to price.

In summary
With the advent of digital creating an increasingly transparent retail environment for Connected Consumers, dynamic pricing may soon be consigned to the history books of retailing.

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