Food insecurity in the U.S. is at an all-time high, with one in four Americans struggling to afford basic groceries due to rising food costs – a situation only exacerbated by inflation. Amid this crisis, the growing interest of major retailers in a strategy called dynamic pricing raises concerns that its widespread adoption could further hinder Americans’ ability to put food on the table.
Dynamic pricing is a revenue tactic where businesses adjust for products or services in real time, based on factors such as supply and demand and customer behavior, all with the aim of maximizing profitability.
However, as consumer backlash against dynamic pricing intensifies — some even threatening to boycott businesses that employ this model — retailers are beginning to reconsider its implementation.
In contrast, a promising alternative known as dynamic markdowns is gaining traction. This approach focuses on reducing prices for perishables nearing their expiration dates, helping retailers minimize food waste while providing consumers with more affordable options. Dynamic markdowns present a fairer solution in the current economic downturn, benefiting both retailers and customers alike.
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Why Dynamic Pricing Isn’t Working
At first glance, dynamic pricing seems like a smart solution — prices go up when demand spikes and down when there is surplus. However, this strategy is often likened to ‘surge pricing,’ which occurs when prices only rise in response to high demand. For those living paycheck to paycheck, it could mean even necessities become unattainable. While surge pricing has long been used in ridesharing and air travel, its application to essential goods raises significant concerns.
Many view these pricing strategies as “milking” the customer. Shoppers today value transparency, yet dynamic pricing sends the opposite message – that prices can fluctuate at a retailer’s whim. This means retailers can raise prices instantly based on demand – much like how ridesharing apps’ rates spike during rush hour. When shopping for essential goods, consumers expect price stability; sudden price changes can feel unpredictable and exploitative.
Furthermore, dynamic pricing has been linked to growing food insecurity, suggesting that price volatility disproportionately affects lower-income households.
While dynamic pricing aims to optimize profits for businesses, it risks alienating shoppers and worsening food insecurity — issues that cannot be ignored in today’s social and economic landscape.
The Solution: Dynamic Markdowns
What retailers want to avoid is being seen as prioritizing profits over social welfare, especially at times of economic instability. Nevertheless, retailers do need to ensure there’s a way toward financial sustainability for their businesses.
As food insecurity and inflation persist, retailers should adopt a new pricing strategy that benefits both consumers and themselves: Dynamic Markdown Optimization.
This approach focuses solely on reducing prices, particularly for food products nearing expiration, rather than increasing them based on demand and supply. It’s a win-win situation: Lowering costs while enabling retailers to move inventory, maintain profitability and minimize food waste.
Unlike surge pricing or dynamic pricing, dynamic markdowns ensure consumers consistently receive the best value while helping retailers manage inventory and reduce shrinkage. For instance, if a steak is set to expire in four days, consumers can purchase it at a lower price, rather than paying full price for a steak with a longer shelf life. This strategy not only makes food more accessible but also fosters customer trust.
For dynamic markdowns to be effective, clear communication with consumers is essential. Retailers should explain the rationale behind markdowns and their benefits, demonstrating that they are committed to supporting their communities while protecting their profits.
Some additional pricing strategies the industry should consider: Reasonable price limits and loyalty programs that offer predictability, especially for consumers on fixed incomes. Naturally, this will create more stable price margins that will enable consumers to shop without worrying that prices will increase at the drop of a hat if a particular product happens to be a hot commodity.
Conclusion
As food insecurity continues to rise, strategies like dynamic pricing can exacerbate challenges for those already struggling to make ends meet. In contrast, dynamic markdowns present a solution that aligns with both consumer needs and profitability. This approach not only promotes affordability but also enhances sustainability by reducing waste and improving shelf rotation in supermarkets.
In short, dynamic markdowns should become the norm rather than the exception in supermarkets, ensuring that price reductions serve the best interests of both consumer and retailer. No one should have to choose between paying bills and putting food on the table. By adopting this strategy, retailers have a unique opportunity to implement practices that are both profitable and socially responsible, ultimately creating a win-win situation where both businesses and customers can thrive together.
Oded Omer is the CEO and Founder of Wasteless AI, an AI-based markdown optimization software for grocery stores and supermarkets. A technology entrepreneur with 22 years of experience in high-tech start-ups, Omer previously served as CTO at WeissBeerger, a big data/IOT company acquired by AB InBev. He has a proven track record in building technology from ideation to maturity to scale-up. Wasteless AI was born out of a need to address the ethical, environmental and financial problems of food waste in the retail and supermarket industries. Omer sought to create a solution that would generate revenue for supermarket chains by optimizing food markdowns and preventing waste.
