On Monday, Everlane announced that the price of its cashmere sweaters was dropping to $100 from $125.
There’s no sale on. The online fashion retailer is instead responding to the global price of cashmere, which sees fluctuation based on demand and the year’s harvest of goat’s wool, the raw material from which cashmere is threaded and washed. According to EmergingTextiles.com, the cost of cashmere has dropped 22 percent in the past year to $64 per kilo.
Everlane built its retail business on a predication of transparency. It follows a direct-to-consumer model and lists the steps of its supply chain, as well as details around how it lands on the final price per item that customers are expected to pay. Practicing dynamic pricing is meant to build on that relationship of trust between customers and retailer.
Everlane’s cashmere sweater is just one example of dynamic pricing occurring in the retail wild. Here’s what it means for shoppers.
Give me the short version.
Dynamic pricing is a commerce model that changes the price of products and services depending on supply and demand. Prices can change depending on things like competitors’ prices, the time of day, and the time of year. Uber’s surge pricing model is among the most common examples of dynamic pricing in action: riders are expected to pay more when demand is high, in order to draw more drivers onto the roads. Other industries susceptible to dynamic pricing are flights and hotels, as well as mass retail, like Amazon, which uses algorithms to undercut competitors’ prices.
How does that strategy apply to fashion?
In fashion, dynamic pricing most often comes into play when items go out of season or fail to turn over inventory quickly enough. Online retailer Asos, for instance, plays to the reactive flexibility of dynamic pricing by dropping item costs when sales, site traffic or both are quiet in order to pull in budget shoppers.
“Dynamic pricing in retail has been around for hundreds of years, but it’s become a hot topic in the last five years thanks to e-commerce,” said Adheer Bahulkar, retail consultant at A.T. Kearney. “Basically, looking at the competitive pressures of supply and demand, retailers will change their price up or down to maximize profitability. They can do that instantly online.”
That’s a good thing if it means you’re paying less, right?
Most often, this means retailers will cut the cost, putting the item on sale in the hopes that it will sell at a lower price point. But if the habit of putting products on sale in reaction to the market becomes too common, the retailer is undercutting itself. Brands want to build up a loyal customer base, and part of that trust relies on having a sturdy pricing model. Mass retailers like Gap, Banana Republic and J.Crew, which have fallen prey to the aftermath of a perpetual promotion cycle, can attest.
“Dynamic pricing is reactionary. And in apparel retail, if your pricing strategy is reactionary, you lose,” said Geoff Watts, co-founder and CEO of retail data company Edited. “Success is built on retailing ahead of the market, anticipating shifts months out in accordance with lead times and phasing in new product with a strategic, almost musical, cadence to drive sales ahead of saturation.”
Seems problematic. Why’s Everlane doing it?
Everlane is a retailer that’s set out to seem trustworthy to its customers. While most companies don’t change prices in reaction to a global dip in prices, because that’s not something the consumer is aware of when they make a purchase, Everlane wants to be upfront about its profits.
“Everlane’s brand is built around transparency, and it will always be one of those that pride themselves on an honest relationship with their customer,” said Bahulkar. “If you haven’t trained your customers to understand that transparency, it wouldn’t work.”
Think of the reverse: if the price of cashmere was climbing, Everlane would be raising its prices. And even with a loyal customer, Everlane can’t count on them stick around when prices go up, said Bahulkar.
Sounds like a marketing set-up.
For Everlane, it is, at least to some extent. The company didn’t respond to a request for comment for this story, but CEO Michael Preysman told Fast Company: “Sometimes [the price of cashmere] goes up, and when it does, retailers raise their prices. Sometimes it goes down. But when that happens, retailers almost never lower their prices; they just keep the extra profit.”
Preysman is playing the role of good-guy retailer, and for Everlane’s dedicated customers, it works. Everlane’s customers are buying not only the clothing, but into the ethos of a brand they believe they can feel good, or at least better, about.
“Everlane is making their profit level transparent. It would be really hard for a brand without that loyalty to be able to do,” said Bahulkar. “It’s more of a branding strategy rather than a profit-making strategy.”
Watts agreed that Everlane is in a rare position to pull such a strategy off.
“Everlane’s strategy appeals to a small customer segment and is certainly not one that larger retailers, dealing with many different suppliers and manufacturers, or with stores and shoppers globally, should attempt to replicate.”
What challenges would other retailers run into?
Basically, the unpredictability of consumer and competitor behavior has led retailers to follow a predictable pricing strategy.
“Customers want to know what to expect, and the competition is checks and balances,” said Watts. “For most retailers, in terms of manning their own profit loss and expectations for investors, dynamic pricing would make it very difficult to forecast profitability.”
Retailers have also run into problems when using customer data to try to offer them the price they would be most willing to pay, something that Bahulkar said makes customers “very uncomfortable,” even though it’s legal (unless it’s price discrimination based on race or religion). Instead of changing the price of the garment at purchase, retailers have used this data to offer personalized discounts, recommendations and upsells.
“Retailers have gotten better at smart offers,” said Bahulkar.