December 14, 2020
8 min read

5 Tools for Mastering Dynamic Pricing in Grocery

One of the key reasons retailers are focusing on dynamic price adjustments is the ever-increasing volatility of the market and the growing competition. Customer demand and the availability of certain products can change daily, making it almost impossible to run a meaningful forecast of purchase behavior based on typical seasonal trends.  

For grocery retailers, digitization has progressed slowly in comparison to other industries due to its specific complexities, such as the breadth of product ranges, short product life cycles and numerous regional characteristics. But now, retailers are under more pressure than ever to act more agile. Sophisticated software solutions make it possible to depict the complexity of the food retail trade, optimize price processes and strengthen the profitability of a company.  

However, problems often arise around dynamic price adjustments. Here are five of the biggest problems – as well as the approaches to solving them:  

1. Electronic shelf labels

Electronic Shelf Labels (ESLs) are still the exception rather than the standard. However, without ESLs, dynamic price adjustments are very costly and difficult to implement. This is because for every price modification, employees must manually change the label on the shelf.  

This being said, even if retailers don’t have ESLs, they can still make dynamic price adjustments. Price changes can be regularly implemented in all product ranges - but only as many as employees can handle, and only prices that will have the greatest effect in terms of sales or margin potential.  

For example, a discounter in the food retailing sector has an average of 2,500 products. With only 25 price changes daily, the discounter can adjust the prices for a quarter of the entire range to the current market situation within a month. It can enact price changes that have the greatest effect, react to fluctuations in demand and optimize earnings potential all at the same time. Supermarkets, which carry an average of 12,000 products, achieve similar effects in four to eight weeks with 50-100 price adjustments per day.   

2. Organizational structure

The organizational structure of many retailers is very complex. It’s important to be able to map stores using a dynamic pricing software, so different locations can set different, demand-based prices. This type of dynamic pricing is important because purchasing behavior in the Midwest may differ from that in the North, in the same way demand in a large city may be different from that in rural areas.  

Dynamic pricing software supports organizational structure strategies by providing a detailed business unit concept that allows food retailers to digitally map their organizational structure on a one-to-one basis. Once this structure has been created, the retailer can specifically define which areas they want to treat as autonomous, relational or uniform in terms of pricing.  

3. User management

When setting prices, it’s important that individual stores are able to manually adjust prices and override the decisions of the software, if needed. For this purpose, a mature dynamic pricing software must provide an appropriate user and rights management. User management allows authorized employees to operate the software independently and set prices manually--in addition to the algorithmically calculated pricing decisions--for the stores in which they are responsible.  

4. Product relationships

For dynamic price optimization in grocery, it is crucial that relationships between products can be mapped and controlled in detail. The best way to master product relationships is using software.  

Product relationships can be controlled with dynamic pricing in a few ways. First, it is important that families are automatically identified so that all products within it can receive the same price adjustments. Second, it’s important to decouple products from a family and set their price individually. In the same way, margins between product prices can be set dynamically using pricing software. For example, software can establish a price gap between private label products and global brands. Price differences resulting from separate units of measure can also be mapped both centrally and dynamically so that, for example, a can of soda alone never costs more than a six-pack.  

5. Clean data

Dynamic pricing projects in grocery always mean that enormous amounts of data have to be processed, including product master data and transaction data. In addition, the quality of the given data is often not consistent or clean, which can lead to problems.  

A dynamic pricing solution brings two things with it: on one hand, it offers high scalability and performance when processing large amounts of data. On the other hand, it provides powerful procedures that detect and clean up errors or inconsistencies in the data. This is done, for example, by means of sparse pattern recognition and implemented data preprocessing. In this way, a reliable data basis is created, which forms the foundation for software-supported price optimization.   

Bolster existing pricing processes

The most important thing to remember is that a price optimization software should support retailers’ existing pricing processes in a sensible way, while not forcing them to fundamentally change or abandon proven processes. This creates acceptance and trust, both of which are needed to successfully integrate dynamic pricing into business processes. If you’re interested in learning more, contact us here.