Last year Kingfisher’s CEO, Ian Cheshire famously said that “retailers could soon be using ‘dynamic pricing’ in the same way that airlines and hotels do.” His argument was that electronic shelf-edge pricing in stores would allow retailers to display to-the-minute prices across stores, something that one of his companies, Castorama already does, and he plans to install similar mechanisms across the UK-based B&Q stores. Mr. Cheshire knows a thing or two about dynamic pricing; he sits on the board at hospitality company Whitbread, owner of Premier Inn, and has seen how this industry has adopted this pricing approach. Six years ago, Premier Inn was known for having just 2 room rates (£29.95 and £59.95). But today, they offer “tens of thousands of prices.” This hotelier is not unique in this regard; all hotels have made or are planning to adopt dynamic pricing.
Applicability in Retail
There are reasons for skepticism that this would work in Retail. Firstly, retailers don’t exhibit the same pricing characteristics as hotels. Hotels sell time sensitive and perishable inventory. Secondly, they are capacity constrained: a 100 room hotel cannot offer another room even if demand is high; this is almost not an issue in retail. Thirdly, hotels have predictable demand patterns: business travelers stay during the week, leisure guests typically stay weekends, so prices are set accordingly. In contrast, retailers can always shift their merchandise and/or assortments around to fit the customer footfall patterns and smooth out peak/off-peak periods. Fourth, changing prices dynamically during the day is accepted as the norm in hospitality; in retail it is about the lowest price offer that must remain sacrosanct.
However, dig deeper and similarities start to surface. Retail and hospitality are both B2C businesses, hotels don’t sell out often, and successful new products see high-demand periods, similar to the captive demand patterns in hospitality. Other issues that are common to both industries, and which have a bearing on pricing strategies, are social media, brand dilution, market prices, competitive environment, distressed inventory, and promotional strategies. Finally the always connected customer, who demands consistent service yet offers little loyalty, has given rise to omni channel retail which requires retailers to be consistent on pricing across channels. And Amazon has ultimately changed the game when it comes to intra-day dynamic pricing. So while a debate can rage on whether dynamic pricing is applicable in Retail, there can be no doubt that retailers can benefit from stealing a page or two from the hoteliers’ pricing handbook.
Adapting Hospitality Pricing Best Practices
- The first takeaway for retailers from hoteliers is that pricing is a continuous process: pre-season pricing and in-season promotions and markdowns need to be planned out as continuous and upfront processes, interlinked and predicted. Like hotels, retailers should work towards creating promotions and markdowns as “contingency plans” that are planned and researched well ahead of time through a series of scenarios.
- Second, pricing should move from being product or location centric to being a customer-centric activity. Hoteliers have made this switch with the advent of modern segmentation approaches and their pricing today is completely customer-centric. In an omni channel world, retailers have no choice on this matter: segmenting customers and determining the right offers for each micro customer segment is not just a nice to have, it is absolutely critical.
- The third takeaway from hospitality pricing would be for retailers to harness competitive and social media information. Customers today compare prices and assortments before purchasing; they are constantly influenced by online reviews and ratings. Hospitality pricing incorporates this data into pricing strategies, and so should retailers.
- The fourth takeaway from hospitality pricing is that hoteliers use price sensitive demand forecasts as the base for their entire pricing strategy. Some even extend the use of these forecasts to their promotional planning, marketing, staff and supply planning domains. Similarly, retailers who today use forecasts for fulfillment, inventory and promotion planning purposes, should extend their horizon to financial planning and pricing. Demand forecasts should be used to plan all pricing and promotional decisions across merchandising, category management and inventory management divisions, enabling a coordinated and overall view of demand.
- The fifth, and perhaps the most important, takeaway is organizational. It is a common in retail to assume that the merchandisers understand pricing best; it is all about localization. There is some truth to this; the merchandiser does understand local market conditions well, but increasingly, with a customer having so many touch points with a retailer, and with so many variables going into making a pricing decision, it is time to realize that pricing is actually a “team sport” with a strong central “captain.” Overcoming this organizational barrier is difficult but the hospitality’s franchising sector has successfully found a way forward with central pricing capability with local control. Perhaps, as some literature suggests, the category manager could be seen as this “captain” with his team comprising of buyers, merchandisers, marketing promotions specialists, product designers, etc.?
Can Retail Adopt Dynamic Pricing?
As mentioned above, dynamic pricing is already apparent in retail. Not just Amazon, but traditional stores are emulating this on their websites. There has been some recent reporting about Walmart pricing favoring online shoppers and Staples practicing online dynamic pricing. I would find it hard to believe that these retailers would not adopt a demand-based pricing in stores if technology allowed it. Perhaps Ian Cheshire’s idea of shelf-edge electronic pricing approach has some merit, provided customers begin to understand that prices could change in a store over the course of a day or a week or some time period. But it is easy to see why the skeptics have a valid point: unlike hotels, customers can walk out of your store to find a better price elsewhere, or worse, stop visiting your store because they know you change prices, sometimes upwards. The question ultimately comes down to whether retailers believe shoppers will accept demand-based pricing or not.
What cannot however be denied is that retail pricing can no longer be a static activity. Omni channel complexities are forcing retailers into a continuous planning mode and seasonal cycles are significantly compressed. Up to date information has to be processed continuously and a retailer’s merchandising, assortment and pricing plans must reflect current market conditions and competitive pressures. All pricing actions – pre-season pricing and in-season promotions and markdowns; online, in-store and third-party pricing, must all be coordinated, be consistent and be segmented to suit customer demand and reflect current inventory levels. Even if retailers do not want to move to dynamic pricing, they have no choice but to make their pricing process much more dynamic than what it is today; they have to move from an inside out product/location centric view to an outside in customer-centric view.
Back to the Future!
A decade or so ago, retailers provided the inspiration to hoteliers who embraced price optimization techniques to meet their needs for dynamic pricing; now retailers can return the favor by borrowing best practices from hospitality pricing and adjusting for retail’s nuances. They have to ask themselves if they are ready with a dynamic offer for a customer at all times based on current conditions and customer preferences. Hoteliers certainly have answered this question in the affirmative. It is time for retailers to do the same.
What do you think?