DYNAMIC PRICINGWhat Retailers Need to Know About Competing in Real Time

MAY 2013

Krista Garcia

Contributors: Danielle Drolet, Stephanie Kucinskas

Read this on eMarketer for iPad

DYNAMIC PRICING: WHAT RETAILERS NEED TO KNOW ABOUT COMPETING IN REAL TIME ©2013 EMARKETER INC. ALL RIGHTS RESERVED 2

CONTENTS3 Dynamic Pricing and the Consumer

4 Dynamic Pricing and the Retailer

11 Conclusions

12 eMarketer Interviews

13 Related eMarketer Reports

13 Related Links

13 Editorial and Production Contributors

EXECUTIVE SUMMARY

Online retailers looking to gain margin advantage

are increasingly using dynamic pricing: the practice

of changing prices based on market conditions,

consumer behavior and competitive intelligence.

Amazon.com has used it in various guises since

the turn of the century and as the technology has

become widely accessible, more retailers have

adopted dynamic pricing in order to compete with the

dominant pure play, undercut one another and woo

the ever price-sensitive American shopper.

The ability to react in real time presents opportunities for retailers but is not without its challenges. For many, strategy and execution haven’t caught up with the volume and variety of data available. Quantity counts for little if no one knows what to do with it.

Consumers are still very price-driven, and increased transparency has allowed shoppers to track prices and comparison shop with increasing precision, causing problems for retailers accustomed to setting standards—and in some cases, consumers who are better informed than merchants.

This report covers those issues and gathers more insights from experts on how dynamic pricing can work for a variety of retailers.

KEY QUESTIONS ■ How are retailers using dynamic pricing?

■ How price-driven are consumers?

■ Does dynamic pricing make sense for all

purchase categories?

■ Can retailers compete on more than price alone?

% of respondents

Select Strategic Pricing Business ChallengesAccording to Retailers Worldwide, 2012 & 2013

Increased price sensitivity of consumers67%

57%

Increased pricing aggressiveness from competitors51%

41%

Need to get better return on our inventory investment throughpricing

40%

Increased price transparency—the impact of comparative priceshopping

47%

33%

Need to protect our brand's price image42%

34%

2012 2013

Note: respondents were asked to identify their top 3 challengesSource: Retail Systems Research (RSR), "Tough Love: An In Depth Look atRetail Pricing Practices," April 11, 2013156339 www.eMarketer.com

DYNAMIC PRICING: WHAT RETAILERS NEED TO KNOW ABOUT COMPETING IN REAL TIME ©2013 EMARKETER INC. ALL RIGHTS RESERVED 3

DYNAMIC PRICING AND THE CONSUMER

The pressure retailers are feeling from shoppers,

particularly in the US, is real. Price is important

to all, but Americans are more deal-driven than

others. In a global survey by Rakuten, 75% of US

consumers mentioned price as the leading criterion

when shopping online, in contrast to the global

average of 61%. This figure jibes with November

2012 findings from Accenture that showed price as

the leading influence among 79% of US online and

mobile shoppers.

“The concept of full price is becoming obsolete,” said Eric Best, founder and CEO of Mercent, a retail analytics company. He cited the growing use of mobile devices for comparison shopping and the popularity of daily deals and flash sales as examples. More and more, consumer behavior is dictating pricing.

Because of this resistance to paying what is perceived as full price, it’s the rare shopper who doesn’t do a little homework before making a purchase. A majority of US internet users (63.7%) performed preliminary online research at least most of the time, according to a survey from AYTM Market Research.

% of respondents

Frequency with Which US Internet Users ComparePrices Before Making a Purchase, Jan 2013

Always21.0%

Most of the time42.7%

About half of the time26.5%

Rarely7.0%

Never2.7%

Note: n=400; numbers may not add up to 100% due to roundingSource: AYTM Market Research as cited in company blog, Jan 10, 2013150434 www.eMarketer.com

For two years running, being able to check prices and inventory in real time has tied with ratings and reviews for the most useful online shopping tool among US internet users surveyed by The Integer Group and M/A/R/C Research. In 2012, 56% of respondents ranked price checking No. 1.

Predictive shopping sites like Decide.com that advise consumers when to buy, as well as price trackers like camelcamelcamel and Hukkster, have only made this behavior easier for shoppers. Smartphone adoption and the ability to check prices on the fly have further enabled this process. According to Flurry, an app analytics provider, time spent with price comparison apps in December 2012 grew 247% year over year.

In some ways, consumers have been ahead of retailers with their use of price-prediction tools and sales alerts. Pierce Ujjainwalla, marketing team lead at 360pi, a pricing intelligence firm, suggested that this has been the impetus for the rise of real-time analytics among merchants. “Retailers are using technology like price intelligence to level the playing field so that they can have the same advantage, if not more, than their consumers,” he said.

“Things are so transparent now that the consumer is actually better equipped than the retailer, the manufacturer and distributor than ever before,” agreed Kris Kubicki, co-founder and chief architect of Dynamite Data, a price-monitoring platform. “This is a new place in history.”

This educated consumer has put dread in the heart of many a retailer with a physical store. On top of price sensitivity, the primary pricing worry for US retailers surveyed by RetailWire in June 2012 was that they had to deal with the pricing transparency that the mobile internet has brought into brick-and-mortar stores—and the showrooming that goes with it.

% of total

Primary Pricing Issue that Impacts Their BusinessesAccording to US Retailers, June 2012

Price sensitivity on the part of consumers35%

Pricing transparency/showrooming21%

Intensified discounting/promotional activity20%

Frequency of pricing changes17%

Competitive pressure from online discounters7%

Source: RetailWire, "Pricing Transparency: Can Retailers Regain Control?"Sep 27, 2012145975 www.eMarketer.com

DYNAMIC PRICING: WHAT RETAILERS NEED TO KNOW ABOUT COMPETING IN REAL TIME ©2013 EMARKETER INC. ALL RIGHTS RESERVED 4

Price sensitivity doesn’t tell the whole story, though, because as informed as modern shoppers appear to be, researchers in behavioral economics have found over the past several decades that consumers can be surprisingly blind to what things cost. A 2009 joint study from the Kellogg School of Management, Rice University and University of California at Berkeley found that shoppers didn’t necessarily remember exact prices but only whether something seemed expensive or like a good deal. And a 2012 University of Texas at Dallas survey discovered that between 38% and 46% of grocery shoppers were not aware of the prices of products they were buying.

DYNAMIC PRICING AND THE RETAILER

Once only available to retailers with substantial tech

budgets and in-house talent, pricing intelligence

tools are becoming mainstream as more third parties

begin to provide affordable services. “You have this

arms race that is occurring among merchants, and

the speed and specificity with which you can set and

express a price is accelerating,” said Mercent’s Best.

To wit, a client using Mercent could change prices 24 times per day, and Best said that retailers are repricing 2 million products per hour. “For our most aggressive sellers, the price point for every product in their catalog can be changing every 60 minutes,” he explained.

Dynamite Data research showed just how marked the frequency of price changes have become. Looking at a two-week period around Thanksgiving, when retailers use the holidays as a testing ground, major retailers made more daily price changes in the 2012 Thanksgiving season than in 2011. Both Amazon and Sears manipulated prices daily on around one-quarter of their products during the holiday period last year.

DYNAMIC PRICING: WHAT RETAILERS NEED TO KNOW ABOUT COMPETING IN REAL TIME ©2013 EMARKETER INC. ALL RIGHTS RESERVED 5

Percent of Select US Retailers' Online Products thatChanged Prices Daily During the Holiday Season*,2011 & 2012

Amazon12%

23%

Best Buy11%

11%

Sears9%

25%

Wal-Mart7%

8%

Kohl's5%

3%

Toys "R" Us4%

13%

Kmart2%

16%

2011 2012

Note: *Saturday before Thanksgiving through the Friday after CyberMonday (Nov 19-Dec 2, 2011 and Nov 17-30, 2012)Source: Dynamite Data, April 8, 2013156176 www.eMarketer.com

A desire to stay competitive with Amazon is, in part, a driver of this practice. “Since Amazon is being so sophisticated in the way it has priced, it’s caused everyone else to have to be sophisticated—not only online, but in their retail stores as well,” said Diana Schulz, Dynamite Data CEO.

The rise of marketplaces on sites like Amazon, eBay, Rakuten and Sears.com has also driven the use of dynamic pricing. Merchants aggressively compete against one another, and the retailers themselves, for prime real estate on product pages. Winning a spot in Amazon’s Buy Box is huge—some have estimated that 90% of shoppers purchase through it—and is achievable through low pricing, high ratings and available inventory.

Though online battles between high-profile companies like Target, Wal-Mart and Amazon make headlines, a vast number of retailers do not use pricing intelligence. In the 2013 edition of Retail Systems Research’s (RSR’s) annual pricing survey, just 13% of retailers around the world had fully deployed any solutions. That may sound small, but the option wasn’t even included in the 2012 survey. Fifty-four percent of respondents were somewhere between exploring the idea and rolling it out. Separately, 23% cited gaining margin advantage through dynamic pricing as one of the top three business opportunities related to pricing.

% of respondents

Pricing Intelligence Adoption Among RetailersWorldwide, April 2013

Fully deployed13% Piloting/

in rollout12%

Evaluating/selecting18%Exploring/budgeting

24%

No plans34%

Note: numbers may not add up to 100% due to roundingSource: Retail Systems Research (RSR), "Tough Love: An In Depth Look at Retail Pricing Practices," April 11, 2013156912 www.eMarketer.com

360pi’s Ujjainwalla said, “We’re seeing retailers starting to realize that this is something that they need and that they’re beginning to invest in. The most innovative retailers have it right now, and it’s really becoming more of a base requirement to have.”

And those retailers are feeling pressure from all directions. As previously discussed, the increased price sensitivity of consumers has been an impetus for dynamic pricing to gain margin, and it was the leading business challenge (57%) cited by respondents in RSR’s 2013 survey, followed by growing competitiveness from other retailers (41%) and a need to demonstrate return on investment internally (40%).

DYNAMIC PRICING: WHAT RETAILERS NEED TO KNOW ABOUT COMPETING IN REAL TIME ©2013 EMARKETER INC. ALL RIGHTS RESERVED 6

% of respondents

Leading Strategic Pricing Business ChallengesAccording to Retailers Worldwide, 2012 & 2013

2013

Increased price sensitivity of consumers 57%Increased pricing aggressiveness from competitors 41%

Need to get better return on our inventory investmentthrough pricing

40%

Need to protect our brand's price image 34%

Increased price transparency—the impact of comparative price shopping

33%

Need to provide consistency in price across channels 25%

Increased promotional intensity of competitors 25%

Need to provide more localized pricing 21%

Respond to segment blurring (competition coming fromunexpected places)

2012

67%51%

-

42%

47%

27%

22%

9%

18% 13%

Note: respondents were asked to identify their top 3 challengesSource: Retail Systems Research (RSR), "Tough Love: An In Depth Look at Retail Pricing Practices," April 11, 2013156249 www.eMarketer.com

WHAT RETAILERS NEED TO KNOW ABOUT DYNAMIC PRICING Beyond the mechanics of monitoring and adjusting prices in real time, retailers also need to be aware of potential negative perceptions, what’s holding organizations back from implementing solutions, whether the tactic makes sense for all categories, and how pricing intelligence can influence online ad campaigns.

Data Is a Blessing and a Curse For dynamic pricing, data is the backbone. It’s how products are matched and prices are compared. Big Data also has the potential to be used in specialized ways. Weather patterns could influence prices on snow shovels or sunscreen, and social media could provide insight into products on the verge of going viral.

There’s huge potential for leveraging data, but most retailers are stuck somewhere between the hypothetical and executable. It’s telling that almost everything about using Big Data was a major challenge for the retailers in North America surveyed by Edgell Knowledge Network.

% of total

Challenges in Implementing Big Data Initiatives According to Retail Executives in North America, June 2012

Unclear benefits/ROI

Not a business priority

No resources (people)

No budget

No internal ownershipchampion

No tools

Biggestchallenge

31%

31%

30%

30%

26%

19%

Significantchallenge

46%

31%

41%

35%

35%

44%

Minimalchallenge

17%

28%

17%

28%

30%

28%

Not achallenge

6%

9%

13%

7%

9%

9%

Note: numbers may not add up to 100% due to roundingSource: Edgell Knowledge Network, "State of the Industry Research Series:Big Data in Retail," Aug 28, 2012145217 www.eMarketer.com

When RSR looked specifically at pricing, lacking all types of accurate data was a leading barrier to more effective practices for retailers worldwide. Internal resistance to change was of equal concern, and lack of talent was close behind.

% of respondents

Barriers to Implementing Effective Pricing PracticesAccording to Retailers Worldwide, April 2013

Lack of clean price, competitor and purchase data42%

Resistance to change from stores or other channels42%

Lack of the right skill sets40%

Channel organizational structure makes it difficult to coordinatepricing strategies across channels

34%

Lack of coordination with marketing34%

Can't execute at the level of granularity that pricing solutionsprovide

31%

Resistance to change from merchandising31%

Possibility of negative customer reaction to changes in ourpricing strategy

29%

Note: respondents were asked to identify their top 3 barriersSource: Retail Systems Research (RSR), "Tough Love: An In Depth Look atRetail Pricing Practices," April 11, 2013155525 www.eMarketer.com

DYNAMIC PRICING: WHAT RETAILERS NEED TO KNOW ABOUT COMPETING IN REAL TIME ©2013 EMARKETER INC. ALL RIGHTS RESERVED 7

Peter Fader, professor of marketing at the Wharton School of Business, cautioned against rushing decisions—despite the availability of real-time data. “Today, because we’re drinking from a fire hose, we’re rarely reflecting,” he said. “There’s just much less thought and much more overreacting going on. I really do think that there’s less science in the way that people are making these kinds of tactical decisions than there was 40 years ago. It’s ironic, and it’s sad.”

Decision-making based on price intelligence also assumes that data is error-free. Ujjainwalla said, “Accuracy is the name of the game. When you look at making these kinds of price changes, there’s a lot of money at stake. If you make a change off an incorrect price, you could lose hundreds of thousands—if not millions—of dollars in a day.”

“Choose your battles,” recommended Shmuli Goldberg, director of marketing at Feedvisor, meaning retailers embarking on data-driven initiatives should focus on one thing at a time, whether that’s marketing effectiveness, segmentation or shipping costs.

Negative Consumer Perception Is a Risk Common sense would dictate that shoppers wouldn’t like prices changing on them for the worse, though there has been surprisingly little recent research on the subject. A 2005 poll by the Annenberg Public Policy Center found that 76% of US adult internet users would be bothered if they knew they had paid more for the same product as someone else, and 87% said it wasn’t OK for online retailers to charge different prices in the same hour.

Feedvisor’s Goldberg believes that getting a deal can mitigate ill will. “In a small way, we’ve hit the stage where the customer accepts that prices change online and more often than not, it’s actually to the benefit of the customer.”

“You don’t hear the news stories about the consumers going, ‘Hey, when I checked in, that was lower.’ They just take the deal and run,” said Nikki Baird, managing partner at RSR. But ultimately, she argued for transparency. “The best practice is to inform consumers up front that prices may change.”

Jason Goldberg, previously vice president of strategy and customer experience at CrossView concurred. “Pricing strategies used to fundamentally be predicated on secrets. And we can’t keep the secrets anymore.” (Editor’s Note: Goldberg was in his prior role at CrossView when he spoke with eMarketer. He is now vice president of strategy, multichannel commerce and content at Razorfish.) This might not be a huge problem yet, as he estimated that it’s really the most tech-savvy shoppers, around 10%, who are currently aware of dynamic pricing. “But retailers need to be prepared for tomorrow’s shopper,” he added.

Increased transparency has forced retailers to accept that comparison shopping and showrooming aren’t going away any time soon. As a result, merchants have been trying new tactics to work with consumers—rather than alienate them.

The 2012 holiday season saw many big-box retailers like Target and Best Buy adopt price-matching policies that have remained in place. And consumers have been getting used to the concept. A little more than half of the US internet users surveyed by AYTM Market Research in January 2013 had taken advantage of price matching at least once.

% of respondents

US Internet Users Who Have Ever Taken Advantage ofa Price-Matching Deal, Jan 2013

Yes, many times19.0%

Yes, once or twice35.5%

No45.5%

Note: n=400Source: AYTM Market Research as cited in company blog, Jan 10, 2013150433 www.eMarketer.com

Price matching isn’t a fully agreed upon solution among retailers or experts in the field, though. Many feel it’s a race to the bottom. And in RSR’s pricing survey, retailers with better-than-average year-over-year sales growth, defined as “winners,” were less likely to price match than the “laggards” (16% vs. 24%).

DYNAMIC PRICING: WHAT RETAILERS NEED TO KNOW ABOUT COMPETING IN REAL TIME ©2013 EMARKETER INC. ALL RIGHTS RESERVED 8

Pricing intelligence is increasingly available to sales associates in-store in order to level the playing field. Abt Electronics, a Chicago-based electronics retailer, uses Dynamite Data on the showroom floor. “They use our data in every single sale in order to close it. They will be proactive and check to see what Amazon is selling this product for. And based on that, they will tell the customer they will throw in free delivery and a cable,” said Schulz.

Price matching and empowering employees to negotiate may save a sale in the moment, but a customer unaccustomed to bargaining may think twice about jumping through hoops or parsing a policy’s fine print in the future.

Personalized pricing was the top transparency antidote favored by US retailers that RetailWire surveyed in June 2012, followed by better pricing intelligence.

ranked on a scale of 1-7*

Most Effective Pricing Practices in CombatingProblems Caused by Pricing Transparency Accordingto US Retailers, June 2012

1. Personalized pricing/promotion (e.g., based on relevancy)

2. Improved surveying of competitive pricing (on web, social platforms, etc.)

3. Single zone pricing (i.e., same price for all channels and locations)

4. Pricing based on shopper segmentation

5. Channel-specific promotions

6. Price matching for select SKUs

7. Price matching for all SKUs

Note: *where 1=top ranked and 7=bottom rankedSource: RetailWire, "Pricing Transparency: Can Retailers Regain Control?"Sep 27, 2012146523 www.eMarketer.com

Consumers also favor personalized pricing. Accenture reported that 58% of US internet users surveyed said they would like to receive discounts, presales and unique pricing based on purchase history. In this vein, Safeway’s “just for U” program, which provides loyalty program members with discounts based on past purchases, is often held up as a personalized pricing success. And there is potential for similar initiatives.

“The flip side of dynamic pricing is if there are these opportunities for consumers to say ‘I’m not going to buy this TV at $1,200, but I will buy it at $999, and I’m just going to wait.’ Sure, the risk is that it never gets to that price, but if that information is available to the retailer, it helps them make more intelligent decisions about discounts,” said Baird. “There are opportunities for the retailers who are flexible and willing to experiment.”

That’s exactly what some companies originally built with consumer comparison shopping models have been toying with. Hukkster, which allows users to set email alerts when watched products, or “hukks,” go on sale, has been courting retailers, encouraging them to cut personalized deals for shoppers with their eyes on specific products. Co-founder Katie Finnegan told The New York Times, “Retailers are forced to do, say, 30% off all sweaters, when what they’re really trying to move is the green merino sweater. This provides them the option to do that on a one-to-one basis.”

Michael Paulson, vice president of product and business development at Decide.com, a predictive shopping engine, described a similar idea: “If we allowed retailers to see how many people were waiting for a price drop on a given product, it would be a very obvious thing to say, ‘Well, let’s just make the future happen now. We all know the price is going to drop $70.00 on this camera. Why don’t I go in and offer it to consumers right now for $70.00 less or $55.00 less?’ And then everybody wins.”

Being shown different prices isn’t as detrimental when the consumer benefits. The key is not making it too personal. The latest outrage surrounds Samoa Air charging passengers for plane tickets based on their weight. “Consumers will likely react negatively to having to pay for something that they see as part of who they are,” Deborah Small, professor of marketing at the Wharton School of Business, told Knowledge@Wharton.

BE PREPARED Knowing as much as possible about one’s own products is fundamental, and that goes beyond pricing. Dynamite Data’s Kubicki elaborated: “It’s the stock status, the availability, the ratings and the reviews of those products before you even start building a model. You’ve got to have everything set up before you start jumping headfirst into it.”

Professionals who spoke with eMarketer for this report mentioned inventory awareness time and time again. Baird said, “Dynamic pricing could work to the advantage of a retailer who understands how much supply is out there, because if it’s a huge amount, then being the first to lead in a price drop could really benefit them. And if there’s not enough, being the first to raise your price could actually benefit you. You might end up recouping a lot more margin than you had originally intended.”

DYNAMIC PRICING: WHAT RETAILERS NEED TO KNOW ABOUT COMPETING IN REAL TIME ©2013 EMARKETER INC. ALL RIGHTS RESERVED 9

“Amazon will actually keep a price low when they’re out of stock, hoping to bait competitors to price low,” added Dynamite Data’s Schulz.

It is also inadvisable to be too reliant on a single source. In March 2013, Google announced that it would be shutting down the Google Search API for Shopping, a free tool that retailers and pricing intelligence vendors had used in-house for product matching. In addition to strategy, not everyone has a handle on foundations like the web infrastructure to manage retail intelligence and dynamic pricing. Kubicki cited the example of Target taking time to get up to speed when it launched its own ecommerce site after originally being hosted by Amazon.

This is not a unique problem. According to a 2013 study from RIS News, retiring legacy systems was the top business challenge in the near future for retail executives in North America.

% of respondents

Leading Challenges According to Retail Executives inNorth America, 2013

Retiring legacy systems45.3%

Developing apps to satisfy empowered consumers41.5%

App integration38.7%

Managing big data36.8%

Optimizing stores as a major channel32.1%

Consumer smart devices in the enterprise29.2%

Upgrading store-level bandwith and infrastructure23.6%

PCI compliance17.0%

Mobile security12.3%

Note: over the next 3 yearsSource: RIS, "Retail Technology Study 2013" in partnership with Gartner,March 27, 2013155979 www.eMarketer.com

MANY CATEGORIES HAVE POTENTIAL Opinions differ on the use of dynamic pricing across various categories. The practice originated with higher-consideration products like consumer electronics because the margins tend to be thinner for retailers, and products with uniform stock keeping units (SKUs) are simpler to compare. For example, matching SLR cameras is far easier than peplum skirts or hand-woven rugs, and soft goods may be more subjective for buyers.

“You can get all of the information you need about a video game or a movie or even a TV or a phone just by reading the website, as opposed to having to actually hold it in your hand or touch it,” explained Baird. “And so some of that contributes to the ease and the competitive nature around those things.”

Ujjainwalla didn’t think the incentive was there for shoppers. “It’s unlikely that something like groceries or apparel is going to really benefit from this because it’s unlikely somebody picks up a carton of milk and then goes on their smartphone or on the internet to see where they can save 20 cents,” he said. Grocery and consumer packaged goods also aren’t being sold online in the same order of magnitude of categories currently using dynamic pricing.

According to eMarketer, though, online sales of apparel and accessories ($45.6 billion) were right up there with computers and consumer electronics ($49.3 billion), the leading category, in 2012. The variety of apparel may be harder to parse, and to date, markdowns and flash sales have been the discounts of choice, but the category is not lacking for scale.

On the other hand, Kubicki believes that most products will be dynamically priced in the future. “One very interesting thing about the electronics market is that the inventory behaves quite a bit like produce. Every day, your pineapple and LED TV are worth less than the day before. Dynamic pricing makes a lot of sense for these particular segments because that constant pricing decay has to be managed as a retailer lest you become the last guy on the block with worthless inventory.”

DYNAMIC PRICING: WHAT RETAILERS NEED TO KNOW ABOUT COMPETING IN REAL TIME ©2013 EMARKETER INC. ALL RIGHTS RESERVED 10

Arie Shpanya, founder and CEO of WisePricer, a price-monitoring platform, also didn’t see why dynamic pricing would be any less effective for a range of categories and specifically called out home improvement, decor, office supplies, and accessories and apparel. “It is just a matter of time before dynamic pricing is adopted by the market as a standard. So it’s not whether you should jump on the train. It’s either jump on the train now or you lose the ticket,” he said.

COMPETE ON MORE THAN PRICE The ability to react to market conditions in a split second can provide an edge, but deep discounts across the board aren’t sustainable. And the perception that Amazon always wins on price spurs some merchants in this direction. However, in a test of 600 product searches, ShopSavvy, a mobile price-comparison app, found that Amazon had the lowest prices on new products only 5% of the time.

“Bottom-dollar pricing strategy is not necessarily the right strategy,” said Shpanya. Having a subset of products that are essentially loss leaders is fine for customer acquisition, but attributes like service and shipping are more important in the long run. “Even if some of our retailers offer pricing that’s perhaps 1% or 2% higher than the competition, the buyer will be willing to tolerate that as long as they are provided premium service.”

“Dynamic pricing must be part of a broader suite of activities in which retailers engage,” said Mercent’s Best. “It should be the last rung in a three-step process, after ensuring product and service differentiation and establishing buying plans and forecasting models that can handle dynamic pricing. With these in place, it is easier to avoid price wars or selling solely on price.”

Manufacturers have tweaked models, often at the behest of retailers (think appliances and mattresses) to prevent comparison shopping of commoditized goods. Merchants can also compete on exclusive selections, though, with less frustration to the consumer. Private labels have long served this need, and so can limited editions like what Target, Gap Inc. and H&M have done with designer collaborations. And flash-sales sites like Fab.com and One Kings Lane may be positioned as discounters, but these often sell products that are unique rather than overstock.

Customer service is also an opportunity for online retailers to stand out. While Zappos.com is nearly synonymous with good customer service, many would be hard-pressed to name a handful of retailers with equally strong reputations. (According to the e-tailing group’s 2013 Mystery Shopping Study, those would be Crutchfield New Media, Frontgate, Victoria’s Secret, Room & Board and Godiva.)

It’s also something for omnichannel retailers to keep in mind. A November 2012 survey by the Kellogg Center for Global Marketing Practice found that 40% of in-store shoppers who decided to buy online instead were accidental showroomers. They had no intent of buying online, but left the physical store due to poor customer service, not because of better prices elsewhere.

Convenience, which can take the form of same- or next-day shipping—even at higher cost—or offering visibility into inventory, buy online and pick up in-store options, or shipping out-of-stock items from other stores, can also go a long way in keeping customers happy.

“If [a retailer] can’t beat someone on a price, maybe their return policy is twice as long as one of their competitors. Maybe their next day shipping is free. The differentiator, the thing that makes you great, is what you need to make sure that your customer understands,” said Reid Valfer, associate director of search at Rise Interactive, a digital marketing agency.

Internet users surveyed by Cisco in 2012 provided insight into pricing attitudes. While 53% said they wanted more pricing visibility in-store than two years ago, they were the most interested in value (60%).

“Retailers should be choosing pricing that reflects the overall value that they’re offering. And most companies are either too chicken to do that, or—I hate to say it—not smart enough,” said Wharton’s Fader.

Conveying value is easier said than done, though. JCPenney’s attempts to offer everyday low pricing, but with no promotions, backfired spectacularly. Shoppers like bargains—or at least the feeling that they got a good deal—even if the full price was arbitrary.

DYNAMIC PRICING: WHAT RETAILERS NEED TO KNOW ABOUT COMPETING IN REAL TIME ©2013 EMARKETER INC. ALL RIGHTS RESERVED 11

PRICING CAN INFORM AD CAMPAIGNS Though it hasn’t seen wide usage, pricing information can also be used to help with paid search campaigns. Rise Interactive uses 360pi data in its FeedPro product. Based on competitive pricing data, retailers can set rules so that their ads won’t run if they can see that their prices can’t beat a rival’s. Similarly, this data could show items that are out of stock among competitors, allowing a retailer to lower its keyword bids.

Cars.com and Abt have used FeedPro to pause and restart campaigns based on inventory. Abt’s results were promising: 64% increase in conversion rate, 46% increase in return on ad spend, 37% increase in weekly revenues and 38% decrease in cost per action.

“People go to the Googles and the Bings and intend to find something. A better user experience can be created by being able to target specific ad copy to what they’re looking for. Ultimately, taking advantage of tools that we’ve built … to allow you to change the pricing—and change prices in ads—could be a very powerful thing,” explained Valfer.

CONCLUSIONS Price intelligence should be used wisely, not blindly. Using dynamic pricing solely to react to others can be a losing proposition. Being smart about inventory and consumer behavior can help inform initiatives. “Price changes shouldn’t reflect competition; they should reflect demand conditions,” said Wharton’s Fader.

It doesn’t have to be all or nothing. According to Dynamite Data’s Schulz, there are retailers that are only managing the pricing on 5% to 10% of their products. “Start using the tools that are available to actively manage the pricing on more and more of your product line,” she said. Even a small incremental boost could have big impact.

Dynamic pricing currently benefits higher-consideration categories that are easy to compare, but that could change. The technology that now allows shoppers to price check and retailers to shift prices could be used in new ways, like offering tailored promotions to customers in real time. “I see personalized pricing as a specialized case of dynamic pricing. Right now, we’re applying it at kind of a mass level. Over time, we should expect that if it does catch on that we should see retailers mature in how they target,” said RSR’s Baird.

DYNAMIC PRICING: WHAT RETAILERS NEED TO KNOW ABOUT COMPETING IN REAL TIME ©2013 EMARKETER INC. ALL RIGHTS RESERVED 12

EMARKETER INTERVIEWS

Relevant Price, Not Upselling, Is Key for Online Merchants

Shmuli Goldberg Director of Marketing

Feedvisor Interview conducted on April 10, 2013

Victor Rosenman CEO

Feedvisor Interview conducted on April 10, 2013

Big Mistakes and Best Practices in Dynamic Pricing

Kris Kubicki Co-Founder and Chief Architect

Dynamite Data Interview conducted on April 9, 2013

Diana Schulz CEO

Dynamite Data Interview conducted on April 9, 2013

Agency Explains How to Get the Best ROI on Dynamic Pricing

Reid Valfer Associate Director of Search

Rise Interactive Interview conducted on April 16, 2013

Nikki Baird Managing Partner

Retail Systems Research (RSR) Interview conducted on March 28, 2013

Eric Best Founder and CEO

Mercent Interview conducted on September 18, 2012

Peter Fader Professor of Marketing

Wharton School of Business Interview conducted on April 3, 2013

Jason Goldberg Vice President of Strategy and Customer Experience

CrossView

Interview conducted on September 24, 2012

Editor’s Note: Goldberg was in his prior role at CrossView when he spoke with eMarketer. He is now vice president of strategy, multichannel commerce and content at Razorfish.

Michael Paulson Vice President of Product and Business Development

Decide.com

Interview conducted on December 19, 2012

Arie Shpanya Founder and CEO

WisePricer Interview conducted on April 15, 2013

Pierce Ujjainwalla Marketing Team Lead

360pi Interview conducted on March 28, 2013

DYNAMIC PRICING: WHAT RETAILERS NEED TO KNOW ABOUT COMPETING IN REAL TIME ©2013 EMARKETER INC. ALL RIGHTS RESERVED 13

RELATED EMARKETER REPORTS

Multichannel Pricing Strategy

Adapting to a Showrooming World: How Retailers Are Earning Customer Loyalty

RELATED LINKS

Accenture

AYTM Market Research

Cisco

Edgell Knowledge Network

Retail Systems Research (RSR)

RetailWire

RIS News

EDITORIAL AND PRODUCTION CONTRIBUTORS

Cliff Annicelli Senior EditorKaitlin Carlin Copy EditorJoanne DiCamillo Senior Production ArtistStephanie Gehrsitz Senior Production ArtistDana Hill Director of ProductionNicole Perrin Associate Editorial DirectorAllie Smith Director of Charts