Building upon the previous article, Dynamic pricing, a long-standing practice now enhanced by AI and data analytics, offers retailers the ability to optimize profits through automated, real-time price adjustments. While it presents significant advantages, it also raises concerns about fairness and customer trust. This article explores how retailers can leverage dynamic pricing to create a win-win scenario, balancing profitability with customer satisfaction and long-term loyalty.
Proactively communicating price fluctuations and extending limited-time discounts to loyal customers allows retailers to provide a sense of privileged value. The reward of brand affinity and goodwill as an outcome is the foundation of long-term brand relationships, which are an outcome of strategic dynamic pricing. Another positive impact is possible profit sharing – passing the savings to operation and supply chain partners like delivery personnel during surge pricing periods.
The negative impact of dynamic pricing is retailers wielding their power exploitatively through extreme price gouging, which is disconnected from reasonable supply/demand shifts. In high-demand business scenarios, customers may overlook this. For instance, customers don't perceive premium rideshare services as price gouging during rush hours because providers charge a premium. However, if one retailer offers standard pricing, customers may perceive a similar business charging higher prices as engaging in unfair or excessive pricing practices.
Consumers eventually see through extreme pricing practices masked as market-based pricing adjustments. This practice may breed resentment and distrust over time. There’s no surprise that 2/3rd of consumers in US perceive dynamic pricing as price gouging.2
While dynamic pricing has both benefits and adverse impacts, its long-term viability hinges on retailers striking a balance between profit goals and treating customers equitably. Pushing ethical boundaries risks irrevocably damaging the relationship dynamic pricing aimed to optimize. To map the win-win approach mentioned at the outset, retailers must combine ethical practices with fine-grained technical capabilities.
Let’s explore how to weave them together.
Towards a Win-win Approach in Dynamic Pricing
Identifying a win-win approach in dynamic pricing is a complex ball game. At the end of the day, any retailer would want the best value for themselves and strive to offer the best value to the client. This could be delivery, better pricing (considering that price will increase), or even giving them perceived value. Retailers will have to forecast right, price right, and engage loyal customers with the right offers at the right time. The following steps will be the key to a win-win dynamic pricing strategy.
- Predicting directional dynamic pricing: Leverage forecasting and AI-powered engines
For companies such as Burger King or Wendy's, accurate forecasting of demand shifts and competitor pricing movements on a game night will be crucial for effective dynamic pricing strategies. Retailers must invest in advanced AI and ML capabilities for prediction engines that ingest diverse data streams (historical data, real-time market signals, etc.), and anticipate pricing trajectory, guiding proactive pricing adjustments.
- Engaging customers to benefit from price shifts: Notifying and offering discounts for purchases
As forecasting models empower retailers about upcoming pricing fluctuations, they can transparently communicate these shifts (whether increase or decrease) to customers. Notifying loyal customers of anticipated price hikes incentivizes them to purchase before the increase. Conversely, alerts about upcoming sales or markdowns act as a motivation to delay non-urgent purchases and capitalize on future discounts.
Retailers can extend limited-time promotional pricing to priority customers post notification of imminent price increases. Customers associate this with privileged opportunities to obtain the desired product/service at a lower price than the current market price point. Besides customers, this benefits the brand through appreciation, increased goodwill, and brand loyalty.
- Sharing value delivered to onboard customers: Communicate rationale of DP and incentivize loyalty program adoption
Simply communicating price adjustments doesn't offer complete value to a customer. Retailers need to articulate the rationale and positive customer impacts of their DP strategies. Transparency and timely communications open the door to opportunities as a retailer can offer enrolment into the brand's loyalty/membership program. Providing priority access to promotional pricing tiers, members-only discounts, and tailored shopping experiences is vital here.
- Learning and refining the approach based on performance and adoption: Continuous monitoring and adjusting pricing strategies based on insights
Dynamic pricing is iterative. It requires continual refinement based on performance data and customer responses. Hence, it’s critical for retailers to closely monitor customer sentiment metrics like satisfaction rates, reviews, purchasing behaviors, and any detrimental brand perception impacts.
The positive and negative feedback are insights into possible misalignments between pricing adjustments and consumer expectations and the need for optimizations. Retailers should treat each pricing cycle as a learning experience, use the above insights to fine-tune future forecasting models, modify promotional tactics, clarify value messaging to customers, or course-correct overall strategies as required, to strengthen the win-win dynamic.
Conclusion: Dynamic pricing is a win-win with a fair exchange of values
Undoubtedly, dynamic pricing offers strategic advantages for retailers to drive profitability and thrive against competition. However, they gain immense pricing power, with brands often going too far into exploitative price gouging detached from reasonable market conditions. To avoid the inevitable loss of customer trust and erosion of loyalty, retailers must exercise dynamic pricing responsibly with a customer-centric philosophy.
The win-win approach outlines where retailers utilize dynamic pricing's strengths ethically and transparently to deliver superior value not just to their own bottom lines, but to customers as well. Technology can point the way, necessitating investing in fine-grained AI-driven forecasting and intelligence solutions to make smart, automated pricing decisions. On top of investments, proactively communicating pricing fluctuation rationale, extending privileged discounts to valued customers, and demonstrating thoughtful profit-sharing will also be important steps for retailers.
When dynamic pricing facilitates a mutually beneficial value exchange grounded in fairness, cultivates positive brand sentiments and lasting relationships that sustain businesses. With great power over pricing comes great responsibility and retailers adopting a conscientious pricing stance will be rewarded with deeper customer affinity and advocacy over the long term.
Index
- https://lunchbox.io/the-state-of-dynamic-pricing-for-restaurants-in-2024
- https://www.emarketer.com/content/consumers-view-dynamic-pricing-price-gouging
- https://www.capterra.com/resources/dynamic-pricing-for-restaurants/
References
- https://www.forbes.com/sites/forbestechcouncil/2019/01/08/dynamic-pricing-the-secret-weapon-used-by-the-worlds-most-successful-companies/?sh=7fcf5c53168b
- https://ngugijoan.medium.com/pricing-on-point-the-art-and-science-of-dynamic-pricing-dd543bf80f01
- https://www.upvoty.com/blog/impact-of-dynamic-pricing-on-customer-behavior-and-loyalty
- https://www.business.com/articles/what-is-dynamic-pricing-and-how-does-it-affect-ecommerce/
