Dynamic pricing: An environmental solution that can benefit retailers and consumers?
Large-scale business operations often damage the environment. One industry where this is particularly apparent is the food industry: it is estimated that supermarket food waste amounts to a total of £230 million a year in the UK and around 1/3 of all food produced goes to waste globally. Approximately 8-10% of the world’s greenhouse gas emissions can be attributed to food waste and one of the UN’s Sustainable Development Goals is to achieve 50% less food waste by 2030. Furthermore, there is a correlation between UK supermarkets’ market share and food waste. However, dynamic pricing may be a solution that is advantageous to food retailers, consumers and the environment.
Dynamic pricing is a pricing strategy whereby firms set variable prices to reflect changing market conditions. It is sometimes referred to as demand pricing or time-based pricing. The Israeli-Dutch firm Wasteless has developed dynamic pricing software to prevent food waste. It uses digital price tags so prices can change as frequently as every 10 minutes depending on the expiry date of food as well as other factors such as stock and sales history. The aim is to use pricing to incentivise consumers to purchase food closer to its expiry date and thus reduce supermarket waste. Amid a cost of living crisis with food price inflation reaching 12.4%, as well as ongoing climate concerns, this pricing system seems as relevant and advantageous as ever.
How can it benefit retailers and consumers?
Wasteless have launched their dynamic pricing software in some chains in the Netherlands and Spain, and have trialled it in Italy and New York. Trials in these countries have provided positive results. Data analysis by Wasteless with retailers showed that their software was able to increase revenue by 6.3% in a Spanish supermarket chain and was able to decrease total store waste by an average of 32.7% - proving that dynamic pricing can reduce retailers’ food waste. However, Wasteless did not publish the data analysis of the profits of the Spanish retailer when using dynamic pricing.
This alone does not prove that dynamic pricing systems are beneficial for retailers. On average goods are likely to be sold for less profit due to decreased markups. In some cases, this may lead to marginal losses for retailers. However, Wasteless advertise that on average net margins for supermarkets using their pricing software are 3 percentage points higher. This is because the food which would otherwise be wasted is earning some revenue, going some way in covering the cost of wasted goods. They also claim that the use of their software allows retailers to achieve at least 20% increases in revenue, contrary to the data analysis of the impact of their software in Spain.
One problem for consumers is the potential for price paralysis. Price paralysis – also known as analysis paralysis – refers to the overthinking of a decision due to there being too much data available for the decision-maker to consider. Therefore, consumers may resort to making ‘rule of thumb’ decisions that do not provide the optimum utility for consumers or profit for the retailers. For example, some consumers may find it simpler to settle for the cheapest option, especially where demand is price elastic, but not have considered that they are unlikely to consume the food for a while, by which time the food will have expired and goes to waste, thus damaging the environment and leaving consumers at a loss. Therefore, dynamic pricing could lead to increased domestic food waste, furthering environmental impacts.
Dynamic pricing relies on at least one of two assumptions; that demand for food tends to be price elastic and that people are environmentally concerned. Polling often tells us consumers are concerned about sustainability. In reality, it is difficult to judge and purchasing trends such as the 4x4 trend in the automotive industry indicate consumers are not always truly concerned about sustainability. Also, in wealthier regions, people are likely to want to purchase fresher food which will last longer even if it’s 30p extra, for instance, thus limiting the effectiveness of dynamic pricing in reducing food waste.
Where else can this be implemented and why isn't it in the UK?
Wasteless’ dynamic pricing software for food retail is a relatively new concept but is unique to food as food perishes so has a short shelf life. Therefore, this kind of dynamic pricing has few possible applications in other sectors.
Although the technology has been around since 2017/18 and has not reached the UK, it does not mean it will not. In 2018, $125 million was invested into food waste start-ups (including Wasteless) and it will take time for major retailers such as Tesco to adopt such strategies as they require thorough testing and analysis in different regions of the UK. However, the decision to not implement the system does suggest large retailers assess it to not be profitable or because it may add a layer of complication for consumers. This is because many UK retailers are concerned about food waste. For example, Tesco removed ‘best by’ dates on some ranges of produce and Co-Op actively works with stakeholders to redistribute surplus food.
Alternatively, it could be a case where supermarket giants are waiting for a competitor to adopt it first. Like in many other countries, the UK food industry is an example of an oligopolistic market structure with the five supermarkets with the greatest market share occupying a concentration ratio of over 50%. In an oligopolistic market, prices tend to become ‘sticky’, as firms aim to preserve their market share. Therefore, retailers such as Tesco may be cautious to make radical, potentially risky changes to their pricing strategies.
Overall, new dynamic pricing software has proven that it can significantly reduce retailers’ food waste. Whether it is financially advantageous for supermarkets is less clear. Wasteless’ dynamic pricing software is yet to be tested on a supermarket giant and offers a potential threat to profit margins. According to Wasteless, on average, the software increases profits by 3% but this is not a comforting statistic with its limited testing. For some consumers, it may be favourable. Shoppers in a Dutch supermarket said they thought it was a great idea as it meant they could buy cheaper food and help reduce waste. But it could cause price paralysis and lead to more domestic food waste. Ultimately though, I believe it is a strategy that would beneficial for the environment, consumers and supermarkets, if not implemented across entire retailer chains but on select product ranges.
Edited and Reviewed by Tanish Bagga.
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