How dynamic pricing helps retailers reduce waste and increase profits


16 Oct 2019325 Views

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Forrester analyst Dr Jennifer Belissent explains how and why food retailers can use data and technology to enable dynamic pricing.

Although I didn’t know it at the time, my visit to the 2015 Expo in Milan was a foreshadowing of my current food tech research. I discovered the challenge of feeding the planet, explored new agricultural methods, climbed into new combine harvesters, and browsed through the supermarket of the future – not to mention ate foods from all over the globe.

Little did I know this would all end up relating to my research on how technology – and access to data, in particular – is changing the way we produce, distribute, buy and consume food. It was at Expo, in that supermarket of the future, that I first discovered dynamic pricing.

The low-hanging fruit

Fast-forward to this year, and dynamic pricing has become part of my life. I try to buy my fruit and vegetables seasonally. And, like most people, I watch the prices come down as each season starts and ends.

Who hasn’t eyed those first strawberries that appear on the shelves and debated whether they are worth the €9.99 per kilo? Or gotten excited about the crate of peaches that drops to under €1 per kilo by the end of the summer (but wondered if they could all be eaten in time)? I certainly have.

Dynamic pricing has been the topic of several recent research interviews. How can grocery stores balance the need to recuperate their costs and move produce quickly enough to get it into the hands of consumers before it begins to rot on the shelves? That challenge requires what I’ve now dubbed ‘the taming of the SKU’.

For those not in the retail industry, the SKU (stock keeping unit) is a number assigned to a product by a retail store to identify the price, product options and manufacturer of the merchandise. Essentially, it is used to track inventory.

New inventory management and dynamic pricing solutions help retailers better manage and use that data to drive better outcomes, meaning less food waste and higher margins.

New tech solutions

Wasteless, an Israel-based start-up, focuses on the notion of wasting less. According to its execs, a given supermarket will waste about 6pc of its total turnover, mostly due to expired products. Basically, they are throwing away those products and their potential profits. That has a massive environmental impact and comes at a great social cost, yet retailers have considered it as just a cost of doing business.

A growing focus on the ‘fresh’ category among many retailers, however, means more food waste and more revenue lost. And they now realise how much it costs them.

Wasteless’s dynamic pricing algorithm has a dual function of food waste reduction and increased profitability by looking at factors that drive inventory and demand projections. The solution integrates with retailers’ inventory and point-of-sale systems, and monitors product expiration information that is provided via date-enabled barcodes – an upgraded barcode standard that is emerging but not yet widespread. The results of the pricing algorithm are displayed on electronic shelf labels which are now widely used.

This solution from Wasteless currently uses only the retailer’s internal data, which alone can deliver a big impact without becoming too complex. The challenge is to be able to explain price changes to the retailer. The more complex and the more opaque, the harder it is to explain and the harder it is to get them to trust the recommendations. Additional data might provide incremental improvement but at the cost of understanding.

‘Technology and access to data is changing the way we produce, distribute, buy and consume food’

German software provider GK Software also offers dynamic pricing within its broader portfolio of retail solutions, which includes the application of AI. GK partners closely with SAP and benefited from an SAP investment to expand its retail solutions, including dynamic pricing.

While pricing was historically done in a spreadsheet, the number of factors in the mix now means that it is too difficult to do manually. The GK dynamic pricing solution pulls in data from multiple sources, both internal (inventory, company targets and sales transactions) and external (competitor pricing, seasonal trends and current click data). Combined, this data determines the best pricing options for the store and consumer.

The GK solution also offers outreach to customers through coupons to let them know about price changes and ‘halo’ promotions such as discounts on whipped cream to go with price-reduced strawberries. Recipe recommendations also enable partnerships with major brands, such as a strawberry cheesecake that also promotes Philadelphia cream cheese.

More data needs more understanding

Two trends that vendors are following closely are the need for standardised data and better access, and the need for education and data literacy.

The industry needs to promote common data formats and the adoption of more advanced barcodes to promote greater transparency. The onus is now on manufacturers to publish more data on a product, including what’s in it, where it comes from, how it travelled from there and how long it will stay fresh.

To encourage that kind of transparency, everyone along the value chain needs to understand the value of the data. According to the vendors we spoke to, transparency is rewarded by consumers who would rather buy a product that they can get the details on than one that publishes nothing, even if that product might be ‘better’. Retailers that understand the value of that data will pressure their suppliers to become more transparent and greater data literacy across the board will further transparency.

More and more standardised data means that retailers can better optimise their pricing and promotions, adapting to the shelf life of the product and to customer trends.

Consumers get better produce at a better price. Retailers sell more. The bottom line is: more data equals less waste.

By Dr Jennifer Belissent

Dr Jennifer Belissent is a principal analyst at Forrester serving business insights professionals and their partners with research that examines the tools and services helping organisations better use and share data. She has written and spoken extensively on smart cities, spanning open data initiatives, citizen engagement, the internet of things and connected urban infrastructure.

A version of this article originally appeared on the Forrester blog.