Exclusive Q&A: Why Retailers Should Leverage the Power of Dynamic Pricing

The flurry of tariffs that have reshaped international trade have created multiple challenges for retailers, and among the biggest is their concern about passing along tariff-generated price increases — particularly as consumers remain focused on budget-cutting and value.

For the entire retail ecosystem, these disruptions are sharpening the focus on supply chain flexibility and resilience. These topics were top-of-mind during the COVID pandemic, but may have been put on the back burner when that crisis passed.

Mehmet Altug, Associate Professor of Operations Management at the Costello College of Business at George Mason University and Director of the College’s Center for Retail Transformation, discussed the evolution of dynamic pricing as well as the imperative to strengthen supply chains in a world of increasing global risks.

Retail TouchPoints (RTP): Many retailers have been concerned about the impact of tariffs on their costs and margins, but have been reluctant to implement price increases to offset them. Does dynamic pricing offer a potential solution? 

Mehmet Altug

Mehmet Altug: The concept of dynamic pricing — for example, the way Uber adjusts its pricing based on time of day and driver availability — has been out there for some time now, and more and more industries are considering using it. The idea is that price is seen as a lever to match supply to demand.

Can retailers do this as well? It’s not completely new for them; they’ve been using a version of dynamic pricing known as markdown optimization — lowering prices for items that haven’t sold at the end of a season, for example, to create space for the next season’s products. It makes sense: people’s willingness to pay full price drops as the season progresses. They’re willing to pay more for a T-shirt at the beginning of summer, for instance, versus the end. Another example is that when a new version of a smartphone comes out, prices for the older versions often go down.

RTP: With dynamic pricing, which can change item prices depending on a variety of factors, should retailers be concerned about the potential impact of different customers paying different prices for the same item? 

Altug: When online shopping first came along, retailers were concerned about consumers’ ability to easily check prices, which wasn’t as simple before the internet. The thought was that with everyone having visibility to everything about prices, [using price competitively] would be very hard to do.

But it turns out that online retailers do charge different prices, because consumers are still limited by our comparison skills. Yes, there’s a small segment that scans and compares multiple prices, and retailers offer special prices to certain loyalty program members. Now with the advent of agentic AI, you could ask it to compare prices, and it would do it very quickly.

But as for potential customer backlash, yes, some customers would hate this, but most would have the same reaction as they do to airline pricing, [where a passenger might pay hundreds more for their seat than the person sitting next to them]. Over time you accept this, and it can even be positioned as kind of a game: this time you win, next time you lose, and it evens out over time.

RTP: How have the tariff changes, which have continued with President Trump’s imposition of a 15% across-the-board tariff in February, affected retail supply chains? 

Altug: I see the problem as a bit more general than tariffs; it’s about disruption, and vendors don’t like disruption, which happens in every industry. Today it’s tariffs, but there could be other things that would affect costs. Say there’s a natural disaster and you have a factory where it happens — what do you do? All of a sudden you’re out of supply for that critical component, and you have to find a way to accommodate that change in the system. Or maybe the exchange rate valuation has changed in a specific country; that’s another exogenous shock to the system, and you have to find a way to absorb it. Tariffs represent change, as do wars and political risks in a world where we’re all connected.

RTP: What can retailers and their trading partners do to better absorb and even profit from these changes? 

Altug: I’d say it’s more about conducting risk management with your supply chains. These have mostly been built for cost minimization — for example, [figuring out] the minimum number of manufacturing facilities needed. With risk management, you have to plan some redundancy into the system. So if you only operate three [factories], it might minimize your costs, but you also might need a fourth. That kind of thinking would help to find longer-term solutions, as opposed to just reacting whenever there’s a problem.

There was a lot of discussion about strengthening supply chains during and right after COVID, because it raised a lot of questions about supply chain structure — for example, masks [and protective equipment] for healthcare professionals, [the lack of which] would have serious consequences. That’s what triggered people’s questioning of supply chain design and structure. There were a lot of heated discussions, but it’s slowed down since then.

RTP: What’s your advice for retailers to improve their supply chains and operations in general? 

Altug: Operations are driven by consumer demand — it’s the critical input to any kind of operations. On a simplified level, supply is created at the lowest possible cost or with the most efficient method, and that supply is there to meet some kind of demand; the goal is to match them. So retailers that want to do a better job of that need to understand their demand better. How you come up with forecasts, as well as where that demand is coming from, are key inputs. Because if the input isn’t good, you can’t expect the output to be good.