Is Dynamic Pricing or Loyalty & Rewards Best for Retail?
March 15th, 2023 | 13 min. read
Retailers are constantly looking for ways to maximize profits, increase and improve customer satisfaction. One of the most effective ways to do this is by using different strategies or techniques, such as employing dynamic pricing or loyalty and rewards programs. However, the question of which strategy is best for retailers to use remains a subject of debate. Some argue that dynamic pricing is the way to go, while others believe that loyalty and rewards programs are more effective. But could it be that using a mix of both strategies (in a selective manner) could provide the best outcomes for your business?
For more than a decade now at Pricefx we have been implementing our pricing software technology for hundreds of clients across the globe to build profitability and streamline efficiencies in their businesses. Part of that process has been to work together with those organizations to put a customized pricing strategy in place that fits their overall objectives, including many retailers like yourselves. As a result, we are in a prime position to assist and provide answers to any questions you may have on the topic of what kind of retail pricing strategy will work best for your company.
In this article, we will examine the history of dynamic pricing versus loyalty and rewards in the retail industry. We will continue by exploring the advantages and disadvantages of both dynamic pricing and loyalty and rewards programs and conclude that a mix of the two is usually the best approach in retail (but not always and why).
The History of Dynamic Pricing vs Loyalty & Rewards in Retail
Dynamic pricing can be traced back to the early days of markets and bazaars where prices were negotiated between buyers and sellers based on supply and demand. As retail became more formalized in the 19th century, fixed pricing became the norm, but retailers would still use discounts or promotions to incentivize customers to make a purchase. The airline industry in the 1980s was the first to use computer systems to adjust prices in real-time based on factors such as demand, seat availability, and time until departure. Since then, dynamic pricing has become increasingly common in various industries, including retail. For many retailers, it has evolved into an everyday low pricing strategy model. And with the possibilities of new technology, those prices are now easier to trace and align across diverse sales channels with Electronic Shelf Labels (ESLs,)
The concept of customer loyalty and rewards has always been an essential factor in retail, even before the introduction of modern loyalty programs. Retailers would often offer personalized service, special promotions, and other incentives to their most loyal customers to build long-term relationships and create reoccurring revenue.
The first modern loyalty program was introduced in 1896 by the Sperry and Hutchinson Company (S&H) where customers could earn points by purchasing products and redeem them as rewards.
This program was later expanded to other retailers, and by the 1930s, loyalty programs had become a common feature in the retail industry.
Over time, loyalty and rewards programs evolved to include more sophisticated rewards systems, such as tiered programs, exclusive access to sales, and personalized offers.
In essence, everyday low pricing/dynamic pricing versus loyalty and rewards programs is something which had already developed a tradition before the internet disrupted the retail industry.
Now, with having transparency on every single data point, (price availability, broadness of scope, stock/inventory control etc.) the retail landscape has changed. It is no longer simply Pepsi or Coke with a high value proposition versus RC Cola, K-Classic Cola, and every other lower-priced cola variant.
Now you have dynamic pricing being applied using technology you can change your price as frequently as you need to track your competitors, due to the increased transparency and associated rapid shifts, regardless of brand. However, be wary of starting a price war – they can be the worst possible enemy to driving down your customer’s willingness to pay.
Dynamic Pricing in Retail
Dynamic pricing is a pricing strategy in which retailers adjust the prices of their products or services based on numerous factors such as supply and demand, seasonality, time of day, competitor pricing (the everyday low pricing we mentioned above), and customer behavior. This pricing technique is widely used in modern retail in the everyday low pricing format as it helps retailers increase customer satisfaction and remain competitive in a crowded marketplace.
Dynamic pricing enables retailers to improve inventory management, reduce waste, and boost sales during slow periods.
It also allows retailers to respond quickly to changes in market conditions and maintain price consistency across multiple channels.
However, retailers must be careful not to abuse dynamic pricing as it can lead to consumer mistrust and negative brand reputation.
Have you ever seen a retailer increase their prices on winter boots at the height of winter or their air conditioner prices during a heat wave? Of course it happens and it happens regularly, but it can leave a bitter taste in the mouth as a customer.
Advantages of Dynamic Pricing
One of the biggest advantages of dynamic pricing is that it allows retailers to maximize profits by charging the highest possible price that customers are willing to pay. By analyzing customer behavior and market trends, retailers can adjust prices to match demand and ensure that products are sold at the optimal price point. They can also add on upsell opportunities as ‘must have’ accessories like a HDMI cable at a high margin (100-500%) with use with a digital TV that traditionally has razor-thin profit margins (2-5%). But you need both for the ASAP convenience of using that TV as soon as you get home. It works like an anchoring effect – using the KVI (key value item) as the glowing shiny thing attracting your purchase and bringing the traffic and the accessories paying for your dinner.
Dynamic pricing also allows retailers to quickly respond to changes in the market.
For example, if a competitor lowers their prices, a retailer can adjust their prices to remain competitive. This can help retailers avoid losing customers to their competitors. This practice can be specifically prevalent for commodities and products which are similar prices wherever you buy them. Traffic is very volatile in these situations and competitiveness on KVIs is very important.
Another advantage of dynamic pricing is that it can help retailers manage inventory levels. By adjusting prices based on inventory levels, retailers can reduce the amount of inventory they have to hold, which can save money on storage and reduce the risk of having to discount excess inventory.
Disadvantages of Dynamic Pricing
Despite the obvious advantages, there are also some disadvantages to dynamic pricing. The technological temptation can lead to companies going so far to discriminate different customers against each other. Customers who are willing to pay more for a product may end up paying a higher price than others, which can be seen to be perceived as unfair pricing.
Dynamic pricing can also be difficult to implement effectively. Retailers need to have the right tools and data to analyze market trends and customer behavior. Without the proper resources, retailers may end up making pricing decisions that are not optimal.
A quality automated pricing software solution that responds to prices in real time is almost essential for most modern retail businesses to run a dynamic pricing strategy across channels.
Finally, dynamic pricing can be challenging to communicate to customers. Customers may become confused if prices are constantly changing, and they may lose trust in the retailer if they feel like they are not being treated fairly. if you have many bricks and mortar stores, constantly changing prices can be facilitated with ESLs.
Loyalty & Rewards Programs in Retail
Loyalty and rewards programs are another popular strategy used by retailers to increase customer loyalty and encourage repeat business. These programs typically involve offering points for purchases that can be redeemed for customers rewards, such as discounts, free products, or exclusive access to sales or events, in exchange for their continued patronage.
Advantages of Loyalty & Rewards Programs
One of the biggest advantages of loyalty and rewards programs is that they can help retailers build customer loyalty. By offering customers incentives to continue shopping with them, retailers can increase the likelihood that customers will return to their store in the future. This can help retailers build a loyal customer base and increase their revenue over time. This becomes increasingly important in a business world where recurring revenue is now critical in the success of many businesses.
Loyalty and rewards programs can also help retailers gather valuable data about their customers. By tracking customer behavior, retailers can gain insights into customer preferences and habits, which can inform future marketing and pricing decisions.
By offering customers exclusive access to sales or events, retailers can create a sense of excitement and urgency around their products, which can drive sales and increase brand awareness, which can be a powerful marketing tool.
Rewards programs have evolved in the internet age to include extra services for customer loyalty. For example, on many occasions, Amazon shoppers are being offered exclusive pricing access to the Amazon Prime streaming network. This ensures that Amazon viewers will almost certainly acknowledge the Amazon shopping site as their first port of call when they are ready to shop, and they will also receive free delivery on their purchases. What’s more, the seed is planted that the word ‘Amazon’ becomes synonymous for the phrase ‘online marketplace’ itself – the place you begin your buyer’s journey – (much like ‘Kleenex’ as become a universal term for a paper tissue).
Disadvantages of Loyalty & Rewards Programs
However, there are also some disadvantages to loyalty and rewards programs. One concern is that they can be expensive to implement and maintain. Offering rewards can be costly, and retailers need to have a system in place to track and distribute rewards effectively.
Another disadvantage is that loyalty and rewards programs may not be effective for all customers.
Some customers may not be interested in participating in loyalty programs (they simply want the cheapest price – end of story), or they may not find the rewards offered to be compelling enough to change their shopping habits. This can make it difficult for retailers to justify the cost of implementing a loyalty program.
Increasingly in the internet age of price transparency, loyalty and rewards programs may be seen as manipulative or insincere by some customers. If customers feel like the rewards are not genuine or if they feel pressured to participate in the program, they may be less likely to return to the store in the future.
Loyalty and rewards work best for those “lazy” shoppers who don’t want or have the need to search for the lowest price and are fine with paying more for convenience (just like an added ‘service).
Mixing Dynamic Pricing & Loyalty & Rewards Programs – The Best Pathway for Most Retailers
While both dynamic pricing and loyalty and rewards programs have their advantages and disadvantages, the most effective strategy for retailers is often a combination of the two.
By using a mix of dynamic pricing and loyalty and rewards programs in combination, retailers can create a comprehensive pricing strategy that addresses the needs and preferences of diverse types of customers.
For example, retailers can use dynamic pricing to attract price-sensitive customers who are looking for the best deal. By offering discounts or promotions on certain products, retailers can incentivize these customers to make a purchase.
On the other hand, loyalty and rewards programs are like a ‘catch and pull strategy’ and can be used to encourage repeat business from customers who are more loyal to the brand, prefer your high-quality products or whose willingness to pay is greater.
By offering rewards or exclusive access to sales or events, retailers can create a sense of exclusivity and build a stronger relationship with these customers.
Using the two together is ideal for most retailers.
Firstly, through your loyalty and rewards program as a retailer you have a fish in the net, and you want them to come back, and you want to incentivize them and give them great service with the breadth of your product assortment. On the other hand, of course, you obviously want to deliver attractive prices to encourage customers to come back, or even adopt an everyday low price which needs to be an affordable price to fill your customers’ shopping baskets.
What’s more, retailers can use dynamic pricing and loyalty and rewards programs together to create a sense of urgency around certain products or sales.
By offering a limited-time discount or a special reward for a certain behavior, such as making a purchase before a specific date, retailers can create a sense of urgency that can drive sales and increase customer engagement.
Who is a Dynamic Pricing/Loyalty & Rewards Program Mix NOT FOR in Retail?
While a combination of dynamic pricing and loyalty and rewards programs is often the best approach, there are situations where it may be appropriate to use only one strategy.
For example, if a retailer has a unique or high-demand product (like an I-Phone or a Soda Stream for instance) or another product that is not widely available elsewhere, they may not need to offer discounts or promotions to incentivize customers to make a purchase.
In this case, dynamic pricing may not be necessary, and the retailer may be better off focusing on building customer loyalty through a rewards program.
On the other hand, if a retailer is operating in a highly competitive market, they may need to focus on dynamic pricing to remain competitive. In this scenario, a loyalty and rewards program may not be effective, as customers may be more interested in finding the best deal than in building a relationship with the brand.
Use Pricing Software to Enable a Dynamic Pricing/Loyal & Rewards Mix
For most businesses, a dynamic pricing strategy combined with a loyalty and rewards program can be highly effective in increasing customer engagement and driving sales.
By leveraging the power of a pricing software solution like Pricefx, your business can optimize its pricing strategies in real-time, considering factors such as supply and demand, competitor pricing, and customer behavior.
This enables you to provide personalized pricing and rewards to individual customers, which can help build customer loyalty and increase customer lifetime value. By implementing a dynamic pricing and loyalty program mix and empowering it with pricing software, you can place yourself ahead of the competition and build a sustainable customer base for the long-term success of your organization.
However, which pricing software could be the right one for your business and you establish your dynamic pricing and loyalty and rewards program mix?
Check out this handy article below to assist your company in making the best pricing software choice for you:
However, if you have already done your due diligence and product research, and you know that Pricefx is a strong contender to be the pricing tool that your company is looking for, talk to one of our experts today