Guest article

Dynamic pricing – an unrealised threat for food brands and e-retailers

By Andrew Watts, Founding Partner at KHWS

- Last updated on GMT

Ecommerce could lead to a 'race to the bottom' on price ©iStock
Ecommerce could lead to a 'race to the bottom' on price ©iStock
Technological advances are heralding in a new era of dynamic pricing – what does this mean for the food sector?

Fixed pricing has ruled the high street since 1861 when John Wanamaker opened a department store in a Quaker district of Philadelphia. He introduced price tags for his goods, along with the lofty slogan: “If everyone was equal before God, then everyone would be equal before price.”

Ever since then, consumers have expected the prices of durable goods to remain largely stable. They would certainly never countenance the person behind them in the queue to pay less based on supply and demand.

This expectation is no longer a given. Technology has brought dynamic pricing - the practice of pricing items at a level determined by an individual customer’s perceived ability to pay - to the fore. Advancements in ecommerce and real-time information mean dynamic pricing has become more accessible and widespread.

Consumers have come to expect fluctuating prices in the travel and ticketing sectors based on availability – just look at the 400% price surge that Uber’s travellers were subject to when London was hit by tube strikes at the beginning of 2017. However, with the likes of ASOS, Skyscanner and Amazon leading the way, dynamic pricing is influencing the entire ecommerce landscape, and food and drink products are no exception.

The 'race to the bottom' on price

In a competitive grocery market, retailers are driven by a race to the bottom on price which has led many of them to start developing “smart” pricing strategies that reflect dynamic pricing online. Some European retailers have systems that could change prices tens of thousands of times a day.

However, consumers are getting wise to this, and as a result have started thinking twice before checking out when they think prices are going to fluctuate in the immediate future. They no longer trust the price tag. Consumer trust is precious, and if the trend for dynamic pricing spreads further into the FMCG sector, there is a possibility of causing great consumer concern.

There is nothing more frustrating than purchasing a product, only for it to be dramatically reduced in price shortly afterwards. In grocery, as food prices are pushed higher and higher, consumers will feel increasingly short-changed.

The use of personal data to inform ecommerce pricing strategies is potentially of even bigger concern. Retailers are looking for the higher-value consumers – those who have the greatest brand loyalty, a history of spending more money, or are in more desperate need of a product – and a consumer’s purchase history and preferences will tell all.

The imminent introduction of GDPR legislation in May 2018 raises further questions. Consumers will be able to request that their purchase history is removed, which will immediately inhibit algorithms, impairing dynamic pricing strategies as a result. This could stop food, drink and grocery game changers like Amazon Go and Amazon Fresh in their tracks, as access to comprehensive consumer data is currently their main differentiator.

Leveraging consumer intent and behaviour

Dynamic pricing, as the name suggests, focuses strategy entirely on price. Although budgets will always be an important factor when it comes to feeding a family, we know that it’s not the only thing that motivates shoppers to put things in their baskets. In fact, it’s just one of the many heuristics – we call them mental shortcuts – a consumer goes through when making decisions while shopping.

To achieve long-term success in the face of this price-obsessed ecommerce landscape, food and drink brands, and the online retailers that sell them, would do well to remember that price is not the only consideration. The mental shortcuts that inform purchasing decisions make up a broad spectrum of behaviours and are all rooted in behavioural science. The food and drink sector is no different from any other with factors from the value of sampling, through to peer recommendations, all playing a part in decision making.

How can these mental shortcuts be reframed in a way that makes them both understandable and actionable for brands across a number of sectors, including food and drink? Researchers at Durham University’s Business School are working in conjunction with KHWS to test different creative messaging, in different environments, at different points in the digital purchase journey, with the aim of identifying where, when and how brands should invest their marketing budgets to drive ecommerce sales on third-party platforms.

Considering the broad spectrum of mental shortcuts at play when people are shopping for food and drink, focusing on price above all else may cause brands and retailers alike to lose sight of consumer intent and behaviour. Behavioural science is key to understanding it all, but is still in its infancy from a marketing planning perspective. Price is comparatively easy to understand and control, so it’s unsurprisingly the default prime motivator in the eyes of marketers.

But shoppers are emotional, and the bland, price-driven environments that we see online are simply not the future. Brand emotion is lost in these situations and it’s important for brands to realise that there is another way to influence people.

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