Guest Column | October 10, 2012

Are Retailers Ready for Demand Pricing?

Used with permission from pcAmerica.

By pcAmerica

Can you imagine having a business that changes prices every day or even every hour?

Actually, we do it now.

It used to be that you could go up to the hotel desk and ask for a room. The advertised price for the room may be $300. If you come in with your family, the clerk would tell you that the room is $150. If the clerk remembers you, the clerk may even give you the room for $100. If you were a businessman in a suit, the clerk would tell you that the room was $300 since your boss was probably paying for the room. And, if you were a government worker or politician, you would be charged $500 for the same room.

Now all the room haggling is done by computer.

The best time of day to get a hotel room or airplane ticket is 3 PM to 6 PM. The hotels and airlines know that many businesses reserve their rooms and flights in the morning.

Hotels and airlines have the computers programmed to change prices according to the time of day as well as number of rooms or seats available at a particular time  or date.

It's called on demand pricing.

Many retail stores and restaurants use on demand pricing. Retail stores raise or lower prices according to the time of year and demand for particular items. Add to that, all the sales and marketing in the month prior to Christmas.

They have special sales on certain days of the week and on certain products.

New digital tags are making on demand pricing easier and more sophisticated. The United States is far behind in the use of digital price tags. 

Digital price tags give all types of retail businesses the ability to change prices instantly.

A clothing store that has a "hot" item can instantly change the price. If an item is not selling, a business can instantly place an item on sale.

Even more scary, you may soon be able to integrate your digital pricing with your digital surveillance system. Imagine, your digital surveillance system recognizes that John Smith has just entered the store. Your point-of-sale system knows that James Smith buys Crest Pro Health Tooth Paste once a month. Your point-of sale system sends a signal out to your digital price tag which raises the price by 25 cents. After Mr. Smith leaves the store, the digital price tag reduces the displayed price by 25 cents.

It's all possible now. Does it sound crazy? Not so crazy when you think about how many businesses operate now. Many restaurants charge a different price for those eating at 5 PM on Monday vs. those eating at 7 PM Saturday evening.

That's Demand Pricing in action.

Right now, many retail stores use some form of demand pricing. Many department stores purchase items for $25. They put the items for sale at $50. The items that do not sell are sold at a 25% or even a 50% discount in order to clear the shelves. That's a form of demand pricing.

Some restaurants have special menus for weekends or holidays. That's another form of demand pricing.

Now what if you own a convenience store? You price a bottle of beer at $2.00. You then program your computer pricing strategy to change the digital prices on your merchandise according to demand. If you have lots of beer in stock, the price is $1.25. When the stock goes lower, the price goes up to $2.50. On warm days, the price automatically goes up. On cold days the price goes down. On prime nights, the price goes up to $5.00 a bottle.

A clothing store can raise and lower digital prices automatically according to demand. On cold days, the price of a pair of gloves goes up. On weekends when you have a lot of foot traffic, the price goes up. If sales for a particular item is poor, the price goes down.

Using digital price tags, retailers can raise and lower their prices at will. Using sophisticated computer programs, the price can go up and down depending on sales flow, inventory levels, restocking date of items, weather, day of the week, and even time of day.

Am I getting a little carried away here? Not so much. Retail stores are already doing it in one form or another. Stores like BestBuy place items on the shelf at a very high price. So that LED 3D TV set that you want is $4,000 on October 1st. A couple of "suckers" will buy it for $4,000. November comes along and the price goes down to $3,000. Now, you get all those people who have seen the $4,000 price jump at the chance to buy the TV for $3,000. Of course, if you have the premium gold store coupon, you may even be able to get it for $2,750 (which still leaves a nice profit for the store).

Online stores are highly computerized and are keyed to demand pricing. Automatic computer programs that set selling prices are getting very sophisticated.

Digital price tags are widely used outside of the United States. Kohl's and Walgreens are experimenting with digital price tags within the United States.

It should be noted that many municipalities have laws related to how prices should be displayed and how prices may be altered. Many of these laws need to be changed to keep up with newer technologies.

To learn more about demand pricing and pricing strategies go to:

Pricing Strategies (Wikipedia)