Data-Driven Pricing
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Since the earliest days of commerce, the cost of goods, labor, rent and transportation, and competitor pricing, have shaped how retailers set prices for their goods. As markets have become more competitive and fast-moving, retailers are leveraging technology and deploying modern pricing tools to do what they have always done — manage inventory, respond to consumer demand and compete on price — with greater efficiency and consistency.
These data-driven pricing tools enable retailers to anticipate customer demand and compete on price in an increasingly dynamic marketplace. They can create more choices for consumers, reduce waste or inefficiencies, and result in lower prices because savings are shared by the retailer with the consumer.
Do retailers use data and algorithms to charge consumers more?
Retailers use data to benefit consumers by delivering more savings and discounts and ensure their offers meet consumer trends and needs. Whether a pricing practice is described as algorithmic, dynamic, personalized or surveillance, the use of data, algorithms or technology to display or adjust prices does not, by itself, mean a retailer is assessing an individual consumer’s willingness or ability to pay and charging that consumer more as a result.
Myth vs. Fact
Learn the truth about retail pricing.
An algorithm is simply a set of instructions, typically in the form of a mathematical formula, used to solve a problem. In retail, an algorithm can be as straightforward as taking the total cost a retailer paid for its goods and adding a markup to cover the costs of bringing those goods to market.
Although displaying prices digitally and using algorithmic formulas may sound futuristic, they are simply new tools built on long-standing retail pricing practices. These retail practices do not replace existing consumer protections, and their uses are already governed by federal and state laws that guard against deception, discrimination and consumer data misuse.
Far from being a novel or dangerous practice, algorithmic tools enable retailers to compete more effectively in today’s fast-moving marketplace while providing greater efficiency and accuracy and improving the customer experience.
How retailers compete to make prices more affordable
NRF explains how retailers compete for consumers by providing value and keeping prices as affordable as possible. While tariffs, energy prices, rent, transportation costs and global events can affect the final cost of goods, data-driven pricing helps retailers respond to competitor prices, consumer demand and seasonal trends with relevant discounts, incentives and timely price updates.
What federal and state legislatures are doing about personalized/algorithmic/surveillance pricing
Federal and state legislatures are considering proposals to restrict the use of algorithmic pricing technology and digital shelf labels, while raising important questions about the role of innovation and competition and its subsequent impact on consumers.
The answer is not a patchwork of broad, vaguely worded disclosures, nor is it restrictions on tools that improve customer service, ensure accuracy and eliminate waste. These proposals will make it difficult for grocery stores to efficiently mark down products before they spoil and can no longer be sold. It will also prevent retailers from lowering prices to match seasonal trends and respond to consumer demand.
Creating new compliance burdens will ultimately add to the cost of goods and introduce confusion for the consumer and the shopping experience. Mischaracterizing longstanding pricing practices will discourage retailers from offering personalized discounts, tailored incentives or timely pricing updates — ultimately limiting flexibility and reducing benefits to consumers without addressing conduct that is already prohibited under existing law.
NRF's position on surveillance pricing, competition and consumer protection
The National Retail Federation supports policies that preserve retailers’ ability to respond efficiently to market conditions while protecting consumers and promoting competition. We support a highly competitive retail ecosystem, along with the responsible use of data by retailers to deliver affordable and relevant products to consumers. NRF supports legislative efforts that prohibit the practice of surveillance pricing, which is charging an individual a higher price based on inferences made about that person’s willingness to pay more for a product.
At a time when policymakers are focused on promoting affordability and competition, maintaining retailers’ flexibility to respond to changing market conditions is essential. Algorithmic pricing tools help retailers adjust to supply, demand and the competitive pressures of a digital economy while also supporting fair pricing and consumer choice. NRF opposes deceptive or discriminatory pricing practices.
A robust framework of state and federal laws is already in place to protect consumers. Antitrust laws prohibit price fixing and other anti-competitive behaviors. Consumer protection laws require truthful advertising and accurate pricing, and prohibit deceptive practices. Consumer protection laws also regulate how long items must be offered at a sales price before they can be discounted and advertised as such. More than 40 states and territories enforce price gouging laws that protect consumers from excessive price increases during emergencies and unique times of increased demand. Civil rights laws ban discrimination based on protected characteristics, and 24 state privacy laws regulate how businesses disclose, collect and use consumers’ personal information.
Building customer trust and loyalty is paramount for retailers. Retailers operate in a highly competitive environment where they work to generate loyalty, provide value and deliver the best possible price for consumers.
Dive into data-driven pricing
Curious about data-driven pricing? Learn more about how pricing technology works, how proposed restrictions could affect consumers, what laws already protect consumers, and why these tools matter to retailers.
What goes into a price?
From a retailer’s perspective, pricing is established through a complex and dynamic process that reflects a wide range of factors, including wholesale costs, transportation and logistics, expenses, labor, operating costs, inventory levels, consumer demand and more. These factors are continuously evaluated to maintain equal balance between retailers‘ competitiveness and operational sustainability.
Retailers are price-takers, not price-makers. Despite common myths that prices are adjusted based on the time of day or the number of shoppers in a store, the prices consumers see are often shaped by external factors the retailer cannot control. That’s because retailers are the last link in a long and complex supply chain where other players have already established prices for production, transportation, tariffs and taxes. Merchants adjust prices in response to changing economic conditions, cost of goods, competitor prices and consumer demand.
Maintaining affordable prices has become increasingly difficult as every link in the supply chain contends with evolving tariffs, war, natural disasters and labor shortages. Despite these external pressures, retailers continually look for efficiencies so they can keep prices as low as possible; however, it is important to remember that when costs increase across a supply chain, some costs inevitably pass through to consumers. Even then, the highly competitive nature of the retail marketplace gives retailers a strong incentive to minimize price increases whenever possible while continuing to provide consumers with quality products at affordable prices.
Ultimately, the price a consumer sees reflects the confluence of many factors, including what the retailer pays for the product, the costs of getting it to the consumer, market conditions, inventory levels, competitor prices and consumer demand. Retailers use data-driven pricing tools to help evaluate these factors and make informed decisions, but the goal remains the same: offering products at competitive prices while maintaining a sustainable business to serve customers better.
How does data-driven pricing benefit consumers?
Pricing that is informed by data helps retailers offer lower prices, move inventory more efficiently, and respond to changing market conditions. Research has found that data-driven pricing can generate a lower average price per unit sold and higher sales volume than fixed pricing. Flexible pricing also allows retailers to reduce the prices of slow-selling or perishable inventory in real time rather than leaving it at a fixed price and risking waste. By contrast, requiring retailers to set fixed prices far in advance can increase the risk of misjudging consumer demand, resulting in excess inventory or missed opportunities to offer savings. Data-driven pricing helps retailers make more informed decisions and pass efficiencies and savings on to consumers.
The Progressive Policy Institute has similarly argued that data-driven pricing and personalization can expand consumer choice and affordability, rather than create incentives to maximize individual prices on products. Restricting personalized pricing and discounts could limit the ways that retailers compete for consumers and ultimately result in fewer choices at higher prices.
Data-driven discounts are an important tool retailers use to extend savings to more customers, more often. Data-driven insights enable retailers to squeeze savings from all areas of their businesses, and these savings are shared with customers. Loyalty programs and personalized discounts can be particularly valuable when household budgets are stretched, giving consumers more opportunities to save on products they want or need.
More than 600,000 unique retail businesses compete every day for consumer trust in the United States. Every pricing decision a retailer makes, whether it is marking down perishables, seasonal items or popular goods, is made in a competitive environment where consumers have countless options about where to shop. Loyalty programs and personalized discounts are among the most direct and effective tools retailers use to earn that loyalty, provide relevant savings and compete for consumers. When retailers compete for consumers, consumers benefit.
Would restrictions on data-driven retail pricing practices really affect consumers?
Restrictions would make it harder for retailers to respond quickly to changing costs, consumer demand and inventory levels. They could also slow markdowns on seasonal or perishable products, reduce opportunities to offer discounts or promotions, and add compliance costs that flow into prices.
Retailers operate on thin margins and constantly look for ways to deliver products at competitive prices while managing costs. Pricing technology helps them make those decisions more efficiently and respond to changing market conditions in real time. Restricting these tools could limit one of the ways retailers compete for consumers and potentially result in fewer discounts, less efficient inventory management, and higher costs.
Does data-driven pricing benefit workers or threaten their jobs?
Data-driven pricing tools are designed to help retailers make better decisions and operate more efficiently, not replace the people who run their businesses. Retailers use data and technology to automate repetitive tasks, analyze inventory and demand, identify opportunities to reduce waste, and respond more quickly to changing market conditions. These tools can free employees from time-consuming manual work and allow them to focus on higher-value responsibilities, including focusing on customer satisfaction and running general administrative tasks around the store. As the retail industry continues to innovate in all phases of operations and customer service, employment in the retail sector continues to grow.
Technology has always changed the way retail work is performed. Self-checkout, for example, has become an integral part of the retail experience that reduces checkout times and provides shoppers with more control and independence. Digital shelf labels can similarly eliminate the need for employees to manually print, cut and replace thousands of paper price tags, allowing those employees to spend more time helping customers and performing other store functions. Data-driven pricing tools can also help merchants spend less time manually analyzing data and more time making informed decisions about inventory, promotions and the customer experience.
At its core, retail remains a people-driven industry. Technology is just one of the tools retailers use to support their employees, improve productivity and deliver better experiences for customers. As with any technological innovation, individual jobs and responsibilities may evolve over time, but restricting retailers' ability to use these tools could make businesses less efficient and ultimately make it harder for them to compete, invest in their workforce and keep prices affordable for consumers.
Does using data-driven pricing mean retailers charge different customers different prices?
Using data-driven pricing does not mean retailers charge individual shoppers different prices for the same product. The price displayed on the shelf is the same for everyone shopping in the store. Retailers may offer personalized discounts or promotions through programs that shoppers join voluntarily, such as loyalty accounts and digital coupons, and those programs lower prices for members rather than raising them for anyone.
Consumers are also protected by a comprehensive legal framework governing pricing practices. Retailers already operate under extensive legal requirements prohibiting deceptive pricing, false advertising, price gouging and other unfair practices. These laws regulate unlawful conduct regardless of whether a retailer uses an algorithm, a paper price tag, or any other technology to display or set a price.
How do digital shelf labels work?
Digital shelf labels are small electronic displays, usually e-ink screens like those used in e-readers, that show the same price for every shopper who walks down the aisle. They display prices; they do not set prices, fluctuate prices in real time or track customers. Pricing decisions are made in the retailer’s central system, by the same merchandising teams that set prices today.
A typical system works in three steps:
The retailer’s pricing team sets or updates a price in the store’s central pricing system, the same system that governs the checkout register.
The update is transmitted wirelessly to the shelf label.
The label displays the new price, keeping the shelf and the register in sync.
In short: An digital shelf label is the display, not the pricing decision. This technology simply communicates a price that has already been determined through the retailer’s existing pricing systems.
This is not a new technology. In fact, consumers already encounter similar digital displays every day in gas station signs, drive-thru menus and digital boards at coffee shops. DSLs bring this into retail stores.
DSLs also improve pricing accuracy, which, in turn, helps retailers comply with federal and state laws governing truthful advertising and pricing displays. As an efficiency tool, they can eliminate the tedious task of retail workers having to cut and replace paper labels by hand. Shelf prices can be updated in minutes, allowing staff to spend more time serving customers and reducing the amount of paper and plastic used for traditional price tags.
Importantly, the labels themselves are simply price displays, not cameras or tracking devices, and displaying a shelf price does not require shopper data. Adoption of digital shelf labels remains limited in the United States. Associated Press reporting puts U.S. supermarket adoption at roughly 5% to 10%, compared with about 80% of grocers in Europe, where the technology has been used more widely for years. Several major U.S. retailers have announced large-scale rollouts over the next several years.
If you’re interested in learning more about DSLs, click here.
What laws already protect consumers from unfair pricing?
Consumer protections against unfair pricing practices fall into five buckets under existing law: antitrust; consumer protection; privacy; price gouging; and civil rights. While each law regulates a specific type of conduct — antitrust laws prohibit price fixing and collusion, price gouging laws prohibit exorbitant price increases during emergencies, and privacy laws regulate how businesses collect and use consumers’ personal information — none of them prohibit the use of specific tools used by retailers to set prices.
Deceptive pricing is illegal whether it is handwritten on a tag or set by an algorithm, and under federal and state law, advertised and displayed prices are generally required to match what a customer is charged at the point of sale. With millions of products to price, mistakes can occur, and retailers work quickly to identify and correct them. New technology is focused on increasing the accuracy and transparency of prices for consumers. The use of fluctuating or algorithmically determined prices is not inherently deceptive or unlawful, rather, it is the underlying conduct that determines whether a pricing practice violates the law.
Federal antitrust laws bar price fixing and anti-competitive coordination among competitors. Consumer protection statutes require truthful advertising and accurate price disclosures while prohibiting deceptive practices. More than 40 states and territories have price gouging laws in place designed to shield consumers from exorbitant price increases during emergencies or spikes in demand. Civil rights laws prohibit discrimination in pricing or services based on protected characteristics like race, sex or age. Additionally, 24 states now have comprehensive privacy laws that regulate how businesses collect, use and disclose consumers' personal information.
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