Last week Gina Clementi wrote a smart piece for Goodstory about what happens when brands known for predictable prices start letting those prices move.
Her example was McDonald’s. Reuters found a Big Mac selling for $5.69 at one Fresno restaurant and $6.89 at another just a couple of miles away. It sounds like a fast-food story buy CPG food brands should be paying attention. Because the same technology that helps restaurants and retailers optimize prices creates a different problem for CPG brands: the retailer sets the price and the brand wears it.
If your crackers cost $5.99 today, $7.49 tomorrow, and $4.99 on promotion next week, the shopper probably isn’t thinking about the retailer’s pricing algorithm, they’re thinking about your crackers.
This isn’t quite dynamic or surge pricing
There is a lot getting lumped together under “dynamic pricing.” All three issues are attracting attention right now.
Some of it is ordinary. Retailers have always changed prices based on costs, competition, inventory, and promotions. Algorithms simply let them do it faster and at a much more granular level.
Personalized pricing is different. That is when data about an individual shopper helps determine the price that shopper sees.
And algorithmic price coordination is another issue entirely: whether pricing systems can effectively push businesses that should be competing toward similar prices.
Instacart ended pricing experiments last year after a Consumer Reports investigation found that shoppers buying the same products from the same store at the same time could see differences of as much as 23 percent.
McDonald’s is now facing class-action lawsuits alleging its pricing technology helps coordinate prices across restaurants. The company says AI does not set its menu prices and franchisees remain in control. Members of Congress have also asked the company for more information about how the system works.
Meanwhile Walmart is installing digital shelf labels across its stores while publicly promising shoppers that it will not change prices based on who they are or what it thinks they will pay.
There is clearly some nervousness and lack of transparency here.
Grocery is moving carefully. The technology isn’t.
The dystopian version of dynamic grocery pricing, where the price of ice cream jumps when the temperature hits 95 degrees, is not how major U.S. grocers say they are using digital shelf labels today. In fact, physical grocery has been relatively cautious. Retailers know that people react differently to a changing airline fare than they do to a changing price on milk.
Lawmakers know it too. Maryland became the first state this October to prohibit grocers from changing a food price during the business day and from using personal customer data to determine grocery prices. Other states are moving in the same direction.
But the technology exists. And online, prices already move all the time. That creates a problem for brands even if grocery stores never embrace full-blown surge pricing.
You no longer have one shelf price. You have a price at one retailer, another on Instacart, another on Amazon and perhaps another through a loyalty program.
For the shopper and the brand, they are all your price.
Now the shopper has an algorithm too
This is the part of the story we think matters most.
For years retailers had the sophisticated pricing technology. Now shoppers have it too.
Amazon’s Alexa for Shopping can show a shopper up to a year of price history. It can send an alert when the price drops. It can even buy the product automatically when it reaches the number the shopper has chosen. Amazon says more than 400 million customers have used the shopping assistant in the past 12 months.
Google is heading in the same direction. Shoppers can track a product and, at participating retailers, tell Google to buy it when the price reaches their target.
For brands, that changes pricing in a few important ways.
First, your price history is becoming visible: A shopper no longer needs to remember that your olive oil was $18 three weeks ago. The machine can remember for them.
Second, a promotion can become a reference price: Drop a product from $9.99 to $6.99 often enough and eventually $6.99 starts to look like the real value.
Third, AI can teach people to wait : If the machine knows a product regularly drops 20 percent, why buy it today?
Brands spent decades training consumers to shop promotions.: AI is about to get much better at it than consumers ever were.
Price consistency is brand equity
This is where we think the conversation gets more interesting.
Brands usually treat pricing as a revenue-management issue. It is also a positioning issue.
A stable price communicates something…this is what we cost, …this is what we believe we are worth.
A price that moves constantly communicates something too: maybe there isn’t really a price at all.
Premium brands should be especially careful.
Part of premium positioning is confidence. The product does not constantly need to explain, discount or negotiate its own value. That becomes harder when the exact same product appears at radically different prices across channels.
We’ve seen this ourselves
A specialty cheese brand we know launched nationally in an 8-ounce format at a premium price. Later it introduced a smaller 6-ounce pack at a lower ticket.
On paper, the smaller pack solved an affordability problem.
On shelf, things got more complicated. The new pack required a new item code and new retailer setup. The lower ticket began to look like the better deal rather than simply another format. And today the same cheese can sell at dramatically different prices per ounce depending on the retailer.
The lesson wasn’t really about package sizeor promotion. It was about price architecture. Once consumers stop understanding what something is supposed to cost, it gets harder to tell them what it is worth.
Promotions need to change too
CPG has spent years training shoppers to expect promotion - Buy one, get one, twenty percent off, digital coupon, Member price, TPR…That worked when the shopper mostly saw today's price. It looks different when a machine can see the last 365 days.
Brands should start asking a different question:
What does our promotion strategy look like when the customer can see the entire movie instead of today's frame?
Fewer, clearer promotions may ultimately do more for brand value than constant small discounts.
It also means brands need to understand how retailer algorithms treat their products. How often can the shelf price change?What inputs determine it? Does loyalty pricing differ significantly from the regular price? What happens when a competitor drops its price? Is there a pricing floor?
These are starting to look less like retailer questions and more like brand-management questions.
This matters even more for brands entering the U.S.
There is another group that should pay particular attention: international brands coming into the American market.
They spend enormous amounts of time establishing distributor pricing, wholesale pricing and suggested retail pricing.
Then the product reaches the shelf and discovers that there may be no single U.S. retail price. Amazon can have one number. Instacart another. A retailer loyalty program another. A physical store another. And each can change independently.
That makes the launch price more important, not less. Your first discount can become part of the public price history of the product. Your introductory offer can become the number shoppers wait to see again. Set a launch price you can live with. Then be just as deliberate about the first promotion.
Our take
The biggest pricing opportunity for food brands over the next few years may not be finding a smarter way to change prices. It may be finding a reason not to.
Retailers have algorithms optimizing margin. Shoppers now have algorithms looking for deals. Caught between the two is the brand trying to convince everyone that its product has a value. That makes consistency surprisingly powerful.
The premium signal of the next few years may not be a higher price. It may simply be a price people believe.
