Pricing tactics come under scrutiny in the age of AI
Below is the latest edition of Modern Retail’s Supply Chain Weekly newsletter, which goes out on Mondays at 10 a.m. ET, and dives into all things logistics and supply chain during a tumultuous time for the retail industry. To receive this weekly in your inbox, click here.
Consumer-facing companies are making headlines these days for how they do or do not use data to set consumer prices.
Everything from the rise of digital shelf labels to screenshots of pricing algorithms is fueling concerns among consumers that retailers are increasingly using customer data to engage in dynamic pricing, and it is putting more retailers on the defensive.
Last week, Reuters published an investigation into McDonald’s pricing practices entitled “Inside McDonald’s push to have AI price your Big Mac.” The Reuters report examined how McDonald’s pricing system worked, based on screenshots of the pricing engine taken in August and interviews with nine sources who have “first-hand knowledge of the burger chain’s strategy.”
Screenshots taken by Reuters suggest that franchise owners receive suggestions on how to price items based in part on factors like “customer willingness to pay in your area.”
McDonald’s, for its part, said in a statement on its website refuting the Reuters report that “McDonald’s pricing recommendation tool provides restaurant-specific recommendations. It does not set or change prices. Franchisees decide what prices to charge and whether to use the recommendations available to them.”
Meanwhile, just days before that, Walmart made headlines when it posted a note on its website from its CEO, John Furner, explaining its pricing systems in response to customer concerns.
“AI has added incredible new ways for us to serve our customers and members, and it rightfully also raises questions about the information it has access to,” the note said. When customers use Walmart’s AI assistant Sparky, “that’s an invitation to serve you better, not to use your personal information to set a personalized price. We’ve never used the relationships our associates have with customers to charge more, and we won’t do that with AI.”
The letter included three other commitments from Walmart — that it does not currently, and will not, “set different prices based on who you are or the time of day,” and that its shopping tools wouldn’t either. Furner also promised that “we’ll continue to use your information responsibly and respect your choices.”
What’s driving all these retailers to come out and defend their pricing tactics? As AI becomes more prevalent, concerns around dynamic pricing are growing. There’s a fear that retailers will become more surgical with how they use consumer data. In particular, that they could use AI to make recommendations on what to charge down to the individual shopper level.
Some states have now passed laws taking aim at dynamic pricing. Maryland, for example, passed a law banning the practice at grocery stores. Cailey Locklair, president of the Maryland Retailers Alliance, told Modern Retail at the time that the group had no qualms with the law because “this is not a common industry practice for us at all.” Classic supply and demand — rather than individual shopper data — is the biggest driver of how retailers set prices.
Then in August, the FTC put out a proposed enforcement policy involving personalized pricing, noting, “There is growing public concern that modern data collection and processing capabilities can allow businesses to set personalized prices based on analysis of consumers’ personal data.”
Serial entrepreneur James Sun is the CEO of Kenova, an AI company that has built an agentic quantitative decision system for retailers that helps them look at pricing and marketing spend to optimize for revenue. He says that, generally speaking, people are used to the idea of dynamic pricing around popular events — think airline tickets and hotel prices going up ahead of the Super Bowl.
But, he said, at the same time, if retailers get more surgical about pricing, and change prices more frequently, there’s a risk. People love to compare prices — especially with friends — and they may be turned off from buying from the brand if they feel like they know other people got a better deal.
“I think that’s something the brands have to really consider — that dynamic pricing could impact what the value or the perceived value of that price should be,” he said.
What we’ve covered
Brands Briefing: Hanna Andersson is joining Amazon, with a 90% unique assortment
Children’s clothing brand Hanna Andersson is joining Amazon to reach the mom who needs to get a unique outfit for her daughter’s school function the next day, MR’s Julia Waldow reports. Hanna Andersson launched in 1983 with a mail-order catalog, but closed all of its stores in 2020 to focus on its online business. Now, it’s launching on Amazon in the hopes of reaching a different type of customer. Interestingly, 90% of the brand’s assortment will be unique to Amazon. The way Hanna Andersson sees it — basics and high-frequency purchases like pajamas and playwear make more sense for the Amazon customer. The brand’s DTC site, meanwhile, will continue to carry most of its seasonal products, like holiday pajamas.
Cookware startup Caraway got sued by its competitors. It then used the lawsuit for marketing
In nearly every category now — beauty, cleaning, even activewear — you can find brands that are labelled as “non-toxic.” Cookware brand Caraway is one of them. The brand made a name for itself for its cookware featuring a “non-toxic ceramic coating that is completely free of PTFE, PFOA, PFAS, lead and cadmium,” according to its website. And in order to explain what makes its products different, Caraway has gone to great lengths to contrast its products with what is currently on the market — and that has caught the ire of two of the biggest cookware players on the market, Groupe SEB and Meyer. The two teamed up to file a lawsuit against Caraway, alleging false advertising for labeling non-stick pans as “toxic cookware” in marketing, among other things. For its part, Caraway is now using the lawsuit as fuel for its marketing engine.