Dynamic pricing – prices based on consumer appreciation

What is the right price? What does consumer price acceptance look like? Should prices in the cross channel context be harmonized or differentiated? These are some of the many questions retailers have to contend with, both online and offline. Christina Bunnenberg, Head of Corporate Communication at IFH Köln, to which the ECC Club (cross channel and e-commerce network) also belongs, in conversation with Jens Scholz, CEO at prudsys AG. This interview first appeared in the IFH Köln blog.

Christina Bunnenberg: Dynamic pricing is a hot topic in the e-commerce industry. Is it worth the investment and isn’t everybody just looking to see what Amazon does?

Jens Scholz: When it comes to dynamic pricing, the retailer is mainly concerned with optimizing turnover and earnings. However, inventory reduction, customer retention and price image optimization are also frequent objectives of dynamic pricing. Partial or complete automation of pricing processes is also desirable. Based on price elasticity the algorithm dynamically determines consumer price acceptance for every item and every branch or online shop at any given time while taking competitor prices into account. In so doing it is important to not simply compare competitor prices 1:1. A complex pricing algorithm always evaluates the competitor’s price in the context of the retailer’s own brand strength. At the end of the day it comes down to consumer appreciation, both for the product and for the retailer providing that product. That pays off in hard cash. We have seen considerable increase in earnings in A/B tests. However, nowadays the use of pricing intelligence is not only worthwhile, in many ranges it has become necessary to survive. Amazon changes prices several times a day. If you assume that the Amazon algorithm confers an advantage with each price change, and you must assume that, then you as a retailer must react, immediately and dynamically.

Christina Bunnenberg: How often can retailers adapt prices before customers get annoyed? What have we learned from experience?

Jens Scholz: You could also turn the question around. How long can a retailer leave a price unchanged without annoying or losing the customer? The stable price is not necessarily always in the customer’s best interest. Take gas prices, for example: they are relatively stable compared to the price of oil. The price of oil has fallen steadily since 2014, which is reflected in gas prices. The stable gas price is thus not in the customer’s best interest in this case. There is no market price fairer than the dynamic price because the dynamic price always takes into account the volatile market environment. Supply, demand and environmental conditions are constantly changing. Dynamic pricing aligns itself accordingly. Sometimes that works in favor of the customer’s wallet and sometimes it doesn’t but it is always a fair market price. In some circumstances even price increases are advantageous for the consumer; the effects of a price that is too low can be seen, for example, with the price of milk which led to subsidies in the millions. And to come back to your question, nowadays prices are changed weekly, daily or even several times a day. Amazon is certainly a driving force behind several price changes daily.

Christina Bunnenberg: And what about cross channel retail? Our IFH pricing study indicated that willingness to pay can definitely also be channel-specific. What is the situation for retailers who sell both online and offline?

Jens Scholz: The IFH study “Price strategies in cross channel retail” confirms our experience. If their brand strength allows, retailers can push through a higher price on the market because customers hold these retailers in high regard. A cross channel retailer provides the customer with added value. In bricks and mortar stores customers can touch products, get one on one service and even compare several products if necessary. Customers can take products home immediately, take advantage of on-site repair service and much more. Combining the e-commerce option means that customers can browse online to compare and then pick up the selected product at the store immediately. Cross channel provides added value. The challenge lies in expressing this added value in figures, in other words in analyzing the customer’s willingness to pay. This is exactly where dynamic pricing comes into play. A dynamic pricing algorithm analyzes the willingness to pay and dynamically predicts the price acceptance for every item in every store or online shop at any given time.

Christina Bunnenberg: What do you value most about the ECC Club?

Jens Scholz: I’m a huge fan of ECC events. The BE.INSIDE Premium at DOCK.ONE in Cologne was “hot” in the truest sense of the word. With temperatures soaring above 30 degrees Celsius, Oliver Kahn was not the only one on fire at this fantastic network event. The former world class goalkeeper’s presentation on “Maximizing development potential and dealing with setbacks” was extremely inspirational. The biannual ECC forums also offer good opportunities to exchange ideas in a relaxed atmosphere. And I really appreciate the many well-researched studies conducted by ECC Cologne on current topics in omnichannel retail, which are available to all members.