This post originally appeared on Linkedin as part of a series in which professionals at Shoptalk discuss the most pressing issues facing their industries today.
In a race to the bottom, everyone loses.
Dynamic pricing works. If you need proof, just ask Amazon. It’s made billions with algorithms that all but guarantee it will sell you whatever you want, cheaper than everyone else. Here’s the problem – it just doesn’t work for everyone. Especially apparel retailers.
Here’s dynamic pricing’s inescapable flaw: it’s reactionary. And in apparel retail, if your pricing strategy is reactionary, you lose. Success is built on retailing ahead of the market, anticipating shifts months out in accordance with lead times and phasing in new product with a strategic, almost musical, cadence to drive sales ahead of saturation.
In apparel retail no product is an island, each is a part of a larger assortment that exists to tell a story to customers. To support that model, pricing must be holistic through and through. As tempting as it may seem to chase sales volume down the rabbit hole of dynamic undercutting from the outside, smart apparel retailers know better.
For one, price dropping isn’t a sign of competitiveness; it’s an admission of error. Sometimes an error of product, but more often of pricing. Either way, it never reflects well. Of course, some discounting is healthy and necessary, no one will deny it. When newness slows or holiday shoppers go looking for deals, it can temporarily bait sales. But discounting alone cannot act as proxy for a holistic pricing strategy. In that scenario, it would be closer to a death knell.
Here’s why: a long-term dependence on markdowns dilutes a brand’s value and completely erodes confidence, sometimes irreparably. Ask any retailer that’s had to re-train consumers to buy first price and they’ll tell you it’s more than a struggle, it’s a fight. Increased marketing spend, brand new assortments, re-branding and store closures are its weapons.
Maintaining a ‘first price, right price’ perception is vital to the health of the brand. In a dynamically priced ecosystem, intelligent pricing becomes an unrestricted race to the bottom. A free fall marketed as smart competitive practice. In other words, the exact opposite of what apparel retailers should be doing to protect their top and bottom lines.
That’s not to suggest dynamic doesn’t have value in retail. Hotels, consumer electronics and airlines (who have truly perfected the art) have used it effectively for years to fill rooms, homes and economy seats. But outside of a few benefits (chiefly flash sales and stock clearance) the use case doesn’t add up to much within the apparel retail framework. You don’t shop for a wardrobe like you do for a commuter flight to Denver. That’s reflected in apparel pricing architectures, which are some of the most sophisticated in retail. They’re obsessively designed to build relationships with customers that last years—and connect on a level deeper than commerce.
That holistic approach comes into play here. Using lower-priced entry points across verticals, brands bring new customers into the fold and intensify desirability over time with fresh products and editorial, nurturing those customers up the price point ladder according to a plan. Anyone familiar with the theory of decoy pricing, wherein price points are strategically tiered to steer shoppers from the cheapest option by manipulating an interconnected series of value perceptions, will see the similarity.
Obviously, these architectures are not devised overnight. They’re end results of months of work and demand thorough analysis of strategic market data and the deep insights it yields to support decisions at every level of a range. Each product needs to be priced to pull its weight within its category, and each category needs to be priced to pull its weight within its assortment. To be honest, no retailer is going to put themselves through that only to throw it over to dynamic pricing algorithms that supplant holisticism for a shot at volume sales with lower margins. They aren’t trying to achieve the same thing.
Nothing so perfectly illustrates that clash than in the luxury apparel market, where prices matter less the higher they get. Chalk it up to any behavioral or psychological theory you want, the correlation is real. Look at the $490 Apple watch band at Hermés and ask yourself how dynamic pricing would tackle that if it were pricing Apple watches. If you can’t understand that without an explanation, you can’t understand it with one.
When you buy luxury you’re buying a higher value product as a baseline, but you’re also buying into a heritage, a mythology or just the version of yourself that you aspire to. That’s a hard thing to put a price on, especially if you’re a robot with your “eyes” focused solely on price points.
So if not dynamic pricing, then what?
The answer is analytics to inform, but not necessarily to automate. Owning your market by analyzing your market and looking for insights in the data. Where pricing is concerned that implies an equal awareness of real-time data and historical data. A structured pricing strategy is underpinned by a deep understanding of timing, phasing newness to hold shopper’s attention with desirable products they’ll buy at full price because they understand the value of the product both for what it is and what it means.
But it also means using data to keep your eyes open for opportunities and react to them. That’s different from just being reactionary. Instagram is out there, and it can create a trend overnight, that’s a simple reality. The retailers who have the data to see that are always going to win.
Additionally, when value is expertly communicated, retailers won’t have to worry about smashing the glass and pushing the discounting panic button. They’re free do what they do best— retail. Getting there requires a migration from traditional competitive analyses to system that offers instant access to full market data with no gaps or blind spots. That’s an option available to every retailer right now, and one that some of the biggest and most successful have already adopted and seen huge success.
It’s probably a bit corny to end on your own company’s tagline, but it really is about having the right product at the right price, at the right time. Dynamic pricing, it’s a lovely vision you’re selling – but for now, we’re not buying.
Geoff Watts is the co-founder and CEO of EDITED.