Electronic Shelf Labels and Dynamic Pricing

Dynamic pricing in the grocery industry is becoming more and more a reality thanks to a reduction in investment for the vehicle that will ultimately carry the price of the item, the Electronic Shelf Label (ESL). For years those in the grocery industry have known that price could create more profit if a cost effective platform were available to immediately change the price of any item, at any time, regardless of location in the store. Now, grocers are nearing that reality.  

First, to define dynamic pricing in layman’s terms, it is simply a catch-all phrase for utilizing a set of complex algorithms to refine the science of pricing to maximize profitability. Those algorithms can include almost any variable that creates more purchases for any item on the shelf. As an example, “demand” would be a consideration for a price change as would “supply”. The price that a competitor is charging for the same item, expiration date or even the time of day and weather conditions could be part of determining the optimal price of any product.  Can you imagine the day when the price of an item on the shelf automatically changes when conditions are right to maximize profit? That day is fast approaching.

We already see this type of pricing on Amazon.com or when we buy a plane ticket because the “online” aspect of the sale allows for immediate price changes. Thousands of shelf tags don’t have to be changed so it is relatively easy. If a plane is not filling up, the prices are cut. If the same plane were close to full the price goes up. Dynamic pricing is not just a fad or only for online shopping, it is popping up in unexpected places. The St. Louis Cardinals utilize dynamic pricing to set their ticket price.  

Their website www.stlcardinals.com clearly states the following:

Cardinals single-game ticket prices at Busch Stadium are set through dynamic pricing, a model which helps more accurately price tickets for individual games and provides fans with more price options. By utilizing advanced computer programming linked to the team's ticketing system, the Cardinals adjust ticket prices upward or downward on a daily basis based on changing factors such as team performance, pitching matchups, weather and ticket demand. The structure only affects the sale of tickets to individual games and does not affect the sale of season tickets.

The dynamic pricing model proved to be a great benefit for fans in 2013. Below are a few highlights:

*53% of games in 2013 had tickets available for $10 or less.
*51% of games in 2013 had tickets available for only $5.

So, if this system can work from airlines to baseball teams, why is it not fully embraced by the grocery industry?  The reason is largely that technology and the sheer volume of items has made this type of pricing impractical despite the desire to do so. But ESLs can and are changing that way of thinking. Especially, in Europe where ESLs have been in use for years and have been more accepted, grocers and other stores are starting to experiment with the process of dynamic pricing.

ESLs that are fully integrated with the Point of Sale system take away a big hurdle for this type of pricing. The one remaining hurdle to overcome is development and integration of the various algorithms. One algorithm that is currently being used is a simple supply and demand model as an inventory control method. This method works for a store in Germany by averaging new incoming stock against the cost of the old stock to reach an overall average COGS (Cost of Goods Sold), and then the Point of Sales system applies a uniform 40% markup to the new average. With ESLs the price could automatically change and without lifting a finger, the price would reflect the demand and supply for the item.

On a larger scale a formula could be devised for turkey sales at Thanksgiving, soup in the winter, or alcohol sales for last minute shoppers on game day. Pricing could even be automatically altered based on the time of day to squeeze more revenue out of impulsive late night munchie shoppers.  If properly applied, the price for bananas could automatically fall based upon the time the stock is in the store, eliminating overripe and rotten fruit.

The possibilities are endless and with more affordable ESLs the day may be coming sooner than we think.

For more information on ESLs contact us at info@pos-plus.com.