Home > Blog > Newsletter > Dynamic Pricing Should Come with a Warning Tag

Posted 26 Jul, 2017 | Posted in: Newsletter, Pricing | Tagged: , , ,

With astonishing speed, Uber has disrupted the taxicab industry. Others have looked at their success and dreamed of emulation. The strategy often touted for Uber’s success is surge pricing; charging higher prices at times of high demand. Surge pricing is an example of dynamic pricing, where the price fluctuates depending on one or more factors, like the demand for ride service.

Perhaps the most famous example of dynamic pricing is the airline and hotel industry, where seats and rooms are put out at various prices as time draws closer to the date of usage.

Many have looked at the success of companies using dynamic pricing and see it as a way to get each customer to pay a price close to their willingness-to-pay. Recently, UK supermarkets announced an experiment with screen displays on the shelves for prices. While this has the potential to streamline operations and save the time required for an employee to change tags, this technology has the potential to implement dynamic pricing. For example, stores charge more for sandwiches during lunch hour and even sync with the customer’s cell phone to identify the potential buyer and use big data to determine if they will pay full price or if a discount is required to induce purchase.

While the potential benefits of dynamic pricing are obvious, if done incorrectly, it can be an incredibly dangerous pricing model. In the cases above, dynamic pricing is used to manage capacity. Pricing can be used to manage capacity in B2B markets such as manufacturing, where capacity constraints are a big driver of strategy. Here, charging less to fill capacity can make sense in a downturn, but if not used carefully, can leave the supplier with plants full of low-paying customers when demand is high.

Charging different customers different rates is what most B2B companies do as standard, as each deal is negotiated, but a few words of caution are required:

  • Nobody likes to be a sucker. Procurement’s greatest fear is that an executive gets a glimpse at your price volume plot and they are high and to the right! If you are using dynamic pricing for nothing more than making money from your customers and hoping they don’t find out, that’s a sure way to create a Poker Player. If you are treating transactions as a game, then why shouldn’t your customers? In the airline industry, apps like Hopper and Skiplagged have sprung up to aid the poker playing customer get the best price.
  • Pricing should be rule based and transparent. If a customer is to pay less, they should receive less value in return. Linking price tiers to your identified segments gives customers choice and helps them get the right value for the right price. This price for value trade-off is what we call a give-get and is one of the strongest tools during negotiations; they ensure the customer gets the solution level they want, you protect price, and all sides feel they have been treated fairly.

So while it may be tempting to use big data tools to extract higher prices, once the customer feels aggrieved and starts to play poker, there is no going back.

 

 

 

Richard HarringtonWritten by Richard Harrington

Dr. Richard Harrington is a pricing consultant at Holden Advisors.

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