They will help build trust with the parts of the organization that are not involved but just concerned.Īt, one of our merchants had a pricing logic that she’d embedded into Excel. Early in the process, figure out which merchants are in the 30 percent who have developed a strong pricing logic. Tell them, “We’re building an algorithm that will make pricing decisions in your category, using the same logic that you would use.”Ībout 70 percent of merchants will have opinions on the algorithm: 30 percent will have strong opinions, and the other 40 percent will want to have a say but won’t offer any direct feedback on the algorithm logic. Involve them in the strategy formulation. Seth Moore: Bringing merchants into the process early-so they can contribute to the development of algorithms and strategies-is critical. What role should merchants play in dynamic pricing? McKinsey: You said retailers should take the knowledge that merchants have developed. Once your organization builds that culture-test, fail fast, and learn quickly-then everyone gets more comfortable speeding up the process, taking hands off the wheel, and letting the algorithm drive. As you add velocity, you’re going to have more successes but also more failures along the way, and you need to have some cultural tolerance for that. You should assume that a high percentage of the algorithm’s initial price recommendations won’t be successful. It’s adaptive learning the algorithm continuously learns. There’s also a misconception that dynamic pricing is an algorithm that will magically say, “This is the best price.” The truth is that it won’t automatically tell you the best price-you have to conduct tests to determine the best price. Merchants develop their knowledge over time retailers need to take that knowledge, test it, implement it, and automate it, which will free up merchants to focus on improving assortments and other merchandising levers. The reality is that most of the art is testable and implementable through a rules-based algorithm-so it’s actually science. Seth Moore: Another misconception is that it’s an even split between art and science. Are there other misconceptions you’ve come across? McKinsey: You’ve mentioned one common misconception about dynamic pricing: that it’s all about frequency of price adjustments. And it’s only as valuable as the intelligence in the algorithm. So dynamic pricing increases the rate at which you make good pricing decisions. For most retailers, dynamic pricing lets you arrive at optimal prices over the course of weeks or months rather than minutes or hours. The data don’t change fast enough, and retail inventory is much deeper, which has a dampening effect relative to the frenetic pace in the airline and hotel industries. The answer to “How often should we change our prices?” is “as often as you have enough data to make a better decision than you did the last time you madeĪ price change.” People assume dynamic pricing in retail looks like dynamic pricing in airlines, where prices can change every few minutes-but that’s not the case. Many retailers get caught in the trap of thinking that dynamic pricing is all about the velocity of price changes. Dynamic pricing can add value because it allows you to price the entire catalog with the same deliberate attention you give to important SKUs.īut it can also destroy value if it becomes an objective in itself. You automate pricing intelligence by factoring in a number of components-which typically include competitive data, inventory, and demand changes-and building those components into an algorithm. Seth Moore: I define dynamic pricing as the automation of pricing intelligence, allowing companies to rapidly make nuanced decisions in a scalable way. What’s your definition of dynamic pricing? McKinsey: You’ve become an expert in dynamic pricing over the past few years, but some retailers are new to it and aren’t even sure what it means in the retail context. Various senior roles in product management, analytics,įluent in Spanish lived in Argentina for several yearsĮnjoys chess, fantasy football, and serving as a fishing guide for family, friends, and clients Holds a bachelor’s degree from Brigham Young University
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