Price Optimization is on the Rise in Retail

Price optimization, where retailers use data from multiple sources to adjust their prices, is on the rise. The rate at which retailers adjust their prices change by vertical and store, but prices are certainly changing in response to market forces in a way we haven't seen since John Wanamaker introduced the first price tags in Philadelphia in 1861.

Some of this stems from what we call the “Amazon effect.” Amazon.com changes millions of prices multiple times a day, and in response, retailers of all sizes need to compete. However, there are other forces at play that are driving this change. Namely, the drive for profits, human psychology, and technological advancement.

The Drive for Profits

Retailers know that profits, more than anything else, are what keeps them going. Creating a positive customer experience is important, as are hundreds of other elements, but a business that isn't profitable won't stay around too long, even if it fills a critical need and is loved by customers.

Optimized pricing is all about profits, even when it’s reducing prices. Our research indicates that retailers that adopt optimized pricing typically see about a 30 percent increase in revenue and an 11 percent increase in profits. The reason stems from the algorithms and artificial intelligence (AI) which aren't emotionally connected to prices or tied down to the way things have always been done.

The systems can recognize shifts in supply and demand, as well as competitors' pricing, and adjust prices accordingly to either maximize profits by increasing the price or saving the sale at a reduced profit by lowering the price.

It might consider the weather, the season, or trends in related products as it adjusts prices, always ensuring that profits are factored into the final price.

Inside the Human Head

For a long time, there was a concern that people wouldn’t accept changing prices at retail. Sure, it was OK for an airline to change its prices every day, but why should a box of spaghetti or a pair of shoes change prices?

That’s changed as pricing optimization has made its way throughout public life. In addition to airlines and hotel rooms, as well as the aforementioned Amazon, pricing optimization is everywhere. Surge pricing on ride-sharing applications, flexible prices on toll roads, and sporting events and concerts that change prices based on the timing of the purchase, and in the case of sporting events, the teams or players in the game.

Consumers have acclimated themselves to the flexibility of price, leading to the acceptance of price changes, which do occasionally end up in their favor.

The Changing Tech

For retailers with physical stores, advances in technology have made full pricing optimization possible. For a store with tens of thousands of items, changing prices on an hourly, daily, or even weekly basis wasn’t realistic. The labor costs involved in changing the price tags on that many items wiped out any extra profits.

However, over the last year or so we’ve seen the adoption of technology in this area, which is helping to digitize a previously physical experience.

Electronic shopping labels (ESL) can be synced with the point of sale, enabling uniform price changes that are driven by a pricing optimization platform. Data from computer vision tools, which can identify products on the shelf and enhance inventory tracking, can be used to adjust pricing based on supply and demand.

For those concerned about price changes between taking an item off the shelf and reaching the checkout lane, there are plenty of stores offering scanners to their customers, who can easily take an item off the shelf and scan it to lock in the price.

The time to act is now. Trends are all pointing to increased adoption of optimized pricing through increased ESL orders and other in-store digitalization. Ignoring optimized pricing will put retailers at a decided competitive disadvantage while leaving profits on the table.

Pini Mandel is the CEO and co-founder of QuickLizard, a company that provides AI-powered dynamic pricing technology for e-commerce, brick-and-mortar, and omnichannel retailers.