One of the key reasons why retailers are focusing on dynamic price adjustments is the ever-increasing dynamic of the market and the increased competition. In most industries, flexibility and adaptability are important characteristics that define success, and the coronavirus pandemic has further accelerated this development. Customer demand as well as the availability of certain products can change daily, making it almost impossible to run a meaningful forecast of purchase behavior based on typical seasonal trends. In these economically challenging times, it is particularly important to be able to act agile. How the fashion and consumer electronics industries are meeting this challenge is the subject of my latest blog posts. But for now, let’s focus on food retailing.
For grocery retailers, digitization has progressed slowly in comparison to other industries due to its specific complexities, such as the breadth of product ranges, short product life cycles and numerous regional characteristics. However, food retailers are under pressure to act more agile, so that dynamic price optimization is gaining ground faster and faster here as well. Sophisticated software solutions make it possible to depict the complexity of the food retail trade, optimize price processes and strengthen the profitability of a company.
However, problems often arise around dynamic price adjustment in the food retail industry. Here are five of the biggest problems – as well as the approaches to solving them:
- Electronic Shelf Labels (ESLs) are currently still the exception rather than the standard. Without ESLs, however, dynamic price adjustments are very costly and therefore difficult to implement. This is because every price modification means that staff must manually change the label on the shelf.
However, even if retailers don’t have ESLs, they can still make dynamic price adjustments. This is because dynamic pricing software makes it possible to limit the export of algorithmically optimized prices to the decisive price changes, for example, to those prices that will have the greatest effect in terms of sales or margin potential. In this case, it makes sense to determine the number of possible price changes per day or week on a regional basis. Based on this data, price changes can be regularly implemented in all product ranges – but only as many as employees can handle. In this way, prices of many parts of the assortment are regularly adjusted, and fluctuations in demand can be recorded and reflected in pricing. Automatic label and poster print solutions can support this process and relieve retailers of a large part of manual work.
For example, a discounter in the food retailing sector has an average of 2,500 products. With only 25 price changes daily, the discounter can adjust the prices for a quarter of the entire range to the current market situation within a month. It can enact price changes that have the greatest effect, react to fluctuations in demand and optimize earnings potential all at the same time. Supermarkets, which carry an average of 12,000 products, achieve similar effects in four to eight weeks with 50-100 price adjustments per day.
- The organizational structure of many retailers in the food retail industry is very complex. Whether it’s flagship stores, regional sales areas or associated branches, it is important to be able to map this structure using a dynamic pricing software, so different branches can set different, demand-based prices. This is because purchasing behavior in the southern part of a country may differ from that in the north, or demand in a large city may be different from that in rural areas.
Dynamic pricing software supports this by providing a detailed business unit concept that allows food retailers to digitally map their organizational structure one-to-one. Once this structure has been created, the retailer can specifically define which districts or branches they want to treat as autonomous, relational or uniform in terms of pricing.
- When setting prices, it is often important and necessary that individual stores are able to manually adjust prices – such as for fresh products – despite the use of dynamic pricing software. Pricing decisions made by those responsible at the point of sale must therefore be able to override the decisions of the software.
For this purpose, a mature dynamic pricing software must provide an appropriate user and rights management. In the same way that retailers can map their branch network using the software, they can also map their employee hierarchy. Authorized branch employees or area managers can thus operate the software independently and set prices manually, in addition to the algorithmically calculated pricing decisions, for the branch or branches in which they are responsible.
- For dynamic price optimization in food retailing, it is crucial that relationships between products can also be mapped and controlled in detail using dynamic pricing software. To do so, the software must be able to recognize different types of product relationships and enable differentiated control of these items. Relationships between products are typically found in price families or in substitute goods.
Product relations can be controlled with dynamic pricing in a few ways. First, it is important that product families are automatically identified so that all products within a family (can) receive the same price adjustments. Furthermore, it makes it possible to decouple products from a family and set their price individually. In the same way, distances between product prices can be set dynamically using pricing software. For example, psychological price gaps between private label products and global brands can be implemented. Price differences resulting from separate units of measure can also be mapped both centrally and dynamically so that, for example, a can of soda alone never costs more than a 6-pack.
- Dynamic pricing projects in the food retail industry always mean that enormous amounts of data have to be processed, including product master data and transaction data. In addition, the quality of the given data is often not consistent or clean, which is problematic for the use of a dynamic pricing solution.
A dynamic pricing solution brings two things with it: on one hand, it offers high scalability and performance with regard to the processing of large amounts of data. On the other hand, it also provides powerful procedures that detect and clean up errors or inconsistencies in the data. This is done, for example, by means of sparse pattern recognition and a correspondingly implemented data preprocessing. In this way, a reliable data basis is created, which forms the foundation for software-supported price optimization.
The most important thing is that a price optimization software supports food retailers’ existing pricing processes in a sensible way and does not force them to fundamentally change or even abandon proven processes. This creates acceptance and above all trust – and both are needed if they want to successfully integrate dynamic pricing into their business processes. Ask me, if you want to know more!