3 Ways Dynamic Pricing Helps Retailers
Dynamic pricing is everywhere. Just about anything purchased through Amazon has been impacted by some element of dynamic pricing. Surge pricing on Uber, toll road prices that rise as traffic builds up, and even concert tickets are using the technology.
While you probably have realized the impact this has on price, you may not have noticed the ways both physical stores and online retailers use dynamic pricing to control inventory and manage supply lines.
1. Manage product pricing. Retailers have thousands of products and optimizing pricing on all those items is near impossible. Most retailers use spreadsheets with rules built in to adjust prices based on a number of factors.
Retailers who use dynamic pricing, however, can ensure that merchandise is priced correctly. Driven by data and AI engines, dynamic pricing platforms consider competitor pricing, inventory levels and other data to recommend the optimal sales price, frequently at multiple points throughout the day.
While this has been challenging to implement in physical stores, electronic shelf labels (ESL) enable those shops to adjust pricing without having their staff spend all day changing prices. By connecting ESLs to an AI-based dynamic pricing engine, these stores are able to stay on top of pricing and ensure that everything is priced at an optimum level. We call this marriage of ESL and dynamic pricing Next-Gen Pricing.
2. Control inventory. Most retailers don't connect inventory to price unless they have an overstock situation and need to reduce price to move merchandise. As a result, they rarely explore ways that pricing can help control inventory. As products sell and inventory is reduced, retailers have an opportunity to increase their pricing on the remaining items.
This accomplishes two things. First, future units sold net higher profits. It also ensures that the store doesn't run out of products. There is nothing more aggravating to a consumer than coming to a store and finding they are out of stock.
At the same time, retailers can reduce prices to move unwanted inventory. Electronics stores can push last year's TVs out the door using lower prices. Groceries can promote produce or dairy products as they near expiration.
By implementing an AI-driven dynamic pricing engine, the system manages inventory needs, and recommends prices that will meet warehousing and stocking needs.
3. Manage supply chains. Supply chain managers always try to balance having enough supply in the pipeline to meet demand without holding on to too much stock. Ideally, cycle stock would meet 100% of the demand without having any inventory on hand. Safety stock would still contain some additional stock, to account for supply and demand uncertainty.
The role of dynamic pricing in supply chains is poorly understood, but it should be used to optimize inventory supply chains. Dynamic pricing is bi-directional, meaning that it determines whether it's advantageous for a retailer to raise or lower prices.
At the same time, demand is also a bi-directional variable based on consumer needs. As demand changes, it's beneficial to the supply chain that prices change as well. Products in high demand but limited supply benefit from higher prices, as it allows suppliers to meet demand.
Conversely, if supply is high, retailers can move products out of the supply chain by lowering prices. Profit isn't high for each item, but they make money on volume while realizing savings as items are removed from the supply chain. The result is a win for the supply chain.
Retailers who maintain their own supply chain channels need to recognize their ability to control inventory levels by manipulating price.