The future of retail is dynamic pricing. So why can't we get it right?

CHICAGO—One of the great (and perhaps underrated) things that the Internet brought to bear is retail pricing. With the ubiquity of connectivity, vendors were suddenly able to use algorithms to change the pricing of their goods and services at a moment's notice.

The good news? A retailer can more easily keep up with market changes and stay relevant.

The bad news? Done poorly, dynamic pricing can be a customer headache. (And you thought the stock market was dizzying.)

Executives from several major companies gathered here at the annual Shop.org Summit to discuss the growing pains from this new dynamic—pun very much intended—to their businesses. Their take? It's about making sure the technology plays into your greater goals.

The business mandate

Best Buy is one of the companies that has engaged in dynamic pricing. Amitabh Biswal, the manager of merchandising operations at Best Buy Canada, said his company was at first just reacting to customers' tendency to comparison shop for electronics.

"It has become very easy for a customer to research prices," he said. "At Best Buy Canada, we have implemented capability that blends in competitive prices. In the past year, we have increased our online assortment by about 20,000 products in Canada. Many of them are not carried in our stores. If a customer is able to get a price online, they should be able to get it in the store as well. So we're able to respond and react to competitive [competition] more quickly."

That's a different approach than the one taken by Ace Hardware, the U.S. hardware store cooperative. Andy Voelker, the retail pricing strategy manager for the company, said that the unique business model of his company—stores are independently owned, making his work around pricing more of an internal recommendation than a mandate—emphasizes the importance of a pricing strategy playing into a greater business goal.

"We really stand for service and quality and convenience—being helpful," he said. "When you walk into a store, they're going to be able to give you advice. We know we're not going to be the lowest price in town, but we're going to price fairly. Using the data best we can, the best execution of our strategy, with the best information we can, such as competitive data. That's really where our focus is—getting that right foundational data so we can execute more consistently."

Within the last two years, Ace has been working to implement a pricing demand system with IBM. Because the company is not competing to be the lowest-priced retailer around, and emphasizes relationships above all, Ace is focusing on the rules aspect more than any other, Voelker said.

"The usual optimization is to use math and science to maximize profit," he said. "With our model, I have 3,500 bosses—the independent store owners. They all have final say and control for the final prices in our stores. So we provide to them the best recommendation for that price. If we say that, on a particular category, we want to be within five to 10 percent of our competitor, it helps us stay within the guard rails of what we want."

The end user

But dynamic pricing can cause headaches at the end of the line, where brick-and-mortar stores suddenly have to worry about pricing on a far more regular basis. It can be a drastic change in mindset, said Amos Schwartzfarb, head of customer development at Joust.

"Change management was probably the largest challenge for us," he said. "Every time you talk to a merchant, they've been living and breathing their set of products for a very long time. To tell them that you know better, or technology knows better, is a very hard [pill to swallow]."

Prior to Joust, Schwartzfarb served as vice president of customer development for the analytics company BlackLocus, which was acquired by The Home Depot in 2012.

"It's more than just a pricing strategy, it's about marrying your pricing strategy to your overall brand strategy," he said. "For some, it's never about the race to the bottom. Some consumers win, some consumers lose, but it's unlikely that you're going to be uncomfortable paying what you're paying."

While the benefits are clear, dynamic pricing could also easily create chaos where there was none before. Biswal recalled 2011, when the computer maker Hewlett-Packard suddenly decided that it would exit the tablet business altogether. "So the [TouchPad] tablets went on firesale. In a matter of weeks, the price went from $250 to $99. What we were able to do was instantaneously update our prices online, and that helped us quite a bit."

On the other hand, it's not all reactive. There are valuable insights tucked away in a more fluid pricing structure, too. Biswal explained how Best Buy Canada customers were complaining that its HDMI cable selection was too expensive. That wasn't quite the whole picture.

"It's not that the actual pricing of HDMI cables skewed high; it's the fact that we didn't have a low-end cable in our lineup," Biswal said. "As soon as we found one, we put it in our lineup. We now have a $3.99 cable to compete with online retailers. It did impact perception for cables as a whole."

He added: "There is a chance that people may feel that they lose control of pricing. That's not the case. It allows us them execute their strategy more effectively and consistently."

For Voelker, dynamic pricing has given his organization a chance to be more nimble and keep with the times.

"The area where we're starting to see the value is going from a single national price to zone-based pricing, which is really industry standard," he said. "It's why you have to put in your ZIP code before you shop at a store. We've known this for awhile, but we just haven't been able to act on it. Our competitor's prices can vary 10 to 20 percent. We need to be much more aggressive in certain areas without giving it away in the rest of the country."

He added: "Price is very personal. It's personal to many different people and rules in an organization. When you're making any kind of change—even a logical one that everyone can agree on at a strategic level—there are still going to be a lot of questions and management of change."

A chance to reflect

The good news? Dynamic pricing puts everyone one a more even playing field, and throws a harsh light on your overall business strategy.

Voelker said that the technology has his company thinking about mega-retailer Amazon much more, even though Ace doesn't compete on price quite like that company does.

"We're not at the point where we're competing head to head, but we definitely recognize them as a competitor," he said. "Think back to your strategy and value proposition: what value do you offer above what Amazon does? Think through it at the more granular level at the different categories you have. There are certain commoditized categories: Amazon sells a lot of the same power tools, so that's an area where we'll be thinking about them a lot more closely, and using them in our decision-making process. Whereas you're never going to really buy paint at Amazon. It's very experiential."

For Best Buy, which does compete on price, it's a chance to empower regular store employees to keep up with the competition—and remind customers of the company's value proposition.

"In Canada, we have enabled a mobile price check app that allows our associates to look up product pricing in real time," Biswal said. "We've been working with them to use it religiously with every transaction. We want to show customers that we are the best price, and we will beat the best price by 10 percent of the difference. There have been challenges with price match—customers will come in with prices from other retailers that have expired. In each of those cases, blue shirts try to take the [best course of action]."

What it looks like, feels like

Never more apparent is the impact of dynamic pricing than in the online store, where personalization can be fully expressed, Schwartzfarb said.

"It's going to continue to shift to technology-driven decision making," he said. "Not just the numbers on a page, but what the page looks like: whether it's skewed toward the female or perhaps by age. I see technology being led by humans but making decisions."

Contrast that with the physical brick-and-mortar store, where pricing has the restraints of reality to consider, Voelker said.

"The online pure-plays will be very technology-driven and very low-touch," he acknowledged. "But any time there's a physical store involved, I think we're going to get to a reset point really quickly around too many changes. If you're changing shelf tags multiple times in the store, now you introduce conflict: what if the customer's still shopping and you change it right in front of them? What if they pick it off the shelf at one price and get to the register and it's another price? That's going to come to a head. Shelf price is going to hit that peak, then get down to individualized pricing and promotions."

While the march toward price transparency will continue, it's "just one part of the equation," Biswal warned. "There's the right [product] assortment, convenience, expedited delivery, customer service, warranty. All of these things matter to the customer."

The technology and the people

"On some level," Schwartzfarb said, "every retail company is going to do some form of competitive pricing intelligence and dynamic pricing. On some level, it's for everybody. They have to have a strategy that this is one of the most important things they have to do. That's the biggest challenge: what do I do when I have it?"

So how do you get dynamic pricing in place, and what do you do with it? It depends on your needs. Schwartzfarb said the "build versus buy" question is less compelling for some companies.

"There are a couple really great solutions out there," he said. "To try to pull that in house it's a very challenging thing. In most cases, it's a buy."

Voelker said that Ace is focusing its sights on attribute-based matching. "What are the five to 10 characteristics that really characterize what that product is?" he asked rhetorically. "Then pull that information from your competitors and compare."

Biswal said that Best Buy is prioritizing data completeness. "The most important thing is accuracy of the data," he said. "You can't make a decision if the data's no good. So it's understanding that landscape. How do you get to the places where you can get that data?"

And then there are the organizational hurdles to address. Dynamic pricing technology may enable your prices to be more fluid, but that won't happen if your approval structure is still stuck in the previous era.

"If you go down a dynamic route with price, that means more frequent changes, which means you need to reduce that approval time," Voelker said. "If you have three people that think they need to weigh in on each change, you're going to run into conflict. Make sure you're aligned."

Biswal agreed. "Involve the key stakeholders early on. Make the technology part of the strategy—it shouldn't be the other way around. Make sure you have the right guard rails in place. Align the competitive strategy with the corporate strategy, and define it in a way when you do and don't want to react. The last thing you want to do is when someone makes a pricing error and prices a laptop at $99, you match it. You're giving them away."

Start small, Schwartzfarb said. "If you're dabbling for the first time, don't walk before you can crawl. Prove it out in a few categories, and learn some things before you move to a massive scale."

Just make sure you know in which direction you're headed before you start moving.

"If you walk around to your [company's] leadership and ask what your pricing strategy is and they say different things," Voelker warned with a grin, "You're not in a good spot."