Introduction
Dynamic pricing is a price-setting approach relying on
data analysis and flexibility. It allows to shape and control price changes on
the fly, depending on customer’s previous interactions with the website and his
general profile. Items like past searches and purchases, location, time and
date of previous searches and purchases are taken into account to generate a personalized
offer.
Dynamic pricing has been around for nearly 15 years
when retailers like Amazon started testing this. So, this isn’t a new practice
but each year that technology advances, so does the way we use dynamic pricing.
As a business owner, the opportunities for delivering more relevant
propositions have improved.
From search history to previous purchases, customer location to
general tastes, it allows a business owner to personalize its offer on a user
per user basis.
This is not only useful for the company (as personalized
offers are more likely to lead to sales); but also for the customer as many
potential cross sells based on his/her interests are uncovered. However, the
amount of information used for personalization can seem daunting at first –
where to start? What can be collected? How can it be used to make sure it
doesn’t invade user privacy?
It generally starts with a cookie, those tiny text
files a website drops on your machine each time you visit a website. There are
ways to limit cookie usage/tracking (and the European Commission has recently
brought the matter to a vote), but everyday users are generally unaware of how
far this goes.
Advertising like Dynamic Pricing and re-purpose advertising are
targeting customers with impressive accuracy these days and the customers
themselves are likely unaware of what is happening.
With the advent of big data, the total number of
information any business possesses and is able to analyze has dramatically
increased. Simply put, the more users and interaction with your website that
occurs; the more data that is available for collection and analysis.
Business Intelligence tools are nowadays more and more
sophisticated; predictive analysis is becoming the norm rather than the
exception. So the question becomes:
How can you use information on
your customers and prospects to personalize your offer – and make it stand out?
Is dynamic pricing the way to go?
As early as 2000, Amazon was experimenting with
dynamic pricing: users were seeing a different price for the same item after
having deleted their browser cookies. This was mostly used for loyalty purposes;
existing customers were recognized and offered a better deal. The result, a
feeling of being ‘special’ and an increased loyalty to the business.
· Dynamic pricing can lead to stronger and quicker sales.
In the early 2000s, it became the norm, notably on airline
websites. Customers with a very specific intent (a plane ticket between 2
cities on a specific date) were identified during their price hopping and this
led to increased fare on their next visit.
The user, while this was not specifically the case,
sensed an urge to book as an increased fee could mean there were fewer
available seats. The sales process is complete and the margin is better.
· Dynamic pricing is based on segmentation
The most important aspect of dynamic pricing is segmentation;
you must understand your user’s base and know what they are interested in and
which price they are ready to pay. The more segmented the better, as it allows
you for further control and further personalization.
· Dynamic pricing can lead to a better margin
If and when your customer base has been properly
segmented and analyzed, specific demographics can be applied, notably in term
of median household income. Asking prospects to enter their postcode (either
when creating an account or during the sales process) can lead to identifying
which suburbs are financially healthier and this can lead to a slightly
different price, increasing your margin.
· Dynamic pricing offers ways to beat competition
A business might compete nationally with other
national businesses and at the same time with local retailers who can be more
aggressive on prices. Again, when asking customers to enter their postcode, it
allows you to align your prices on the competition, should this be your
business model of course.
· Dynamic pricing can be applied on patches
As a company, you do not have to apply dynamic pricing
on your entire catalog. You can however decide to run experiments and see
what difference it can make. in the 2012 London Olympic Committee applied
this strategy to maximize profits from the ticket sales. The same tactic was
also applied by numerous Major League Baseball clubs on a few thousands of
their stadium seats, with increased revenue of half a million dollars. It might
or might not work for you; start by running a test and see the final numbers.
· Dynamic pricing heavily relies on data analysis
Even at a smaller level, a free tool like Google
Analytics can in its latest developments offer a professional level of data
analysis to help you make sound pricing decisions. Use the Channel Contribution mode to figure out which marketing
funnel initiated or brought the most sales; align customer behavior data with
your own CRM to identify visitors; run multivariate tests; track cross-platform
visits under the new Universal Analytics model… The sky is the limit.
· Dynamic pricing is widely accepted
Users have become familiar with ever evolving prices
online, even on the same website and even during the same browsing session.
They have accepted the fact that they will not pay the same price than the
person sitting on the next seat in their flight. Customers have been shopping around; using price
comparison websites and sometimes different browsers/platforms to get a feel of
what would be the lowest price for an item they are willing to buy.
· Dynamic pricing is legal
As long as dynamic pricing is not discriminating users
based on their sex, age, race, religion and other usual discriminative factors,
it is perfectly legal.
Dynamic pricing has a bright future
Long will be the days when dynamic pricing was solely
limited to online purchases. Trends for dynamic pricing lie in retail. Products
will see their price tag vary based on multiple factors and likely to be nearly
individually
However, dynamic pricing is not ready for brick and
mortar businesses; you simply cannot change a price tag in front of a customer
or update it before he goes to the register. The key here resides in tailoring
promotions and discounts, rather than the item price itself.
The long and the short of it is that dynamic pricing
has been around for a long time now and it’s only getting more and more
advanced. From profile to taste, needs and aspirations, it allows a better
price shaping for an increased margin. It is however becoming a topic for
retail shopping as well. And this is where the present and future of dynamic
pricing resides:
Being able to identify and target specific customers on an
individual basis and offer them a product they want, they can afford, and that
they need at that exact moment, will possibly change retail forever.
However, the whole dynamic pricing model does imply
two major changes:
- The business will need to be ready to adapt prices on the fly, sometimes multiple times a day, no more fixed prices for everyone. This flexibility will be the key to success.
- Customers will have to adapt to ever changing prices. Some customers will win, some will lose; and as a business you need to be ready for managing this important behavioral change within your customer base.
Even if price plays an important role in the final
purchase decision, this is just one of the factors customers take into account
when deciding on a purchase. Things like shipping, customer service, and
convenience all play a part in the equation. At the end of the day, don’t put
all of your eggs in the same basket and make sure you never veer from your
businesses core values or initial goals.
Summary - Dynamic pricing for retailers/e-commerce
Dynamic pricing is expanding into new areas, such as
retail and E-commerce. This has been driven by advancements in technology and
new sophistication - and expectations - of consumers.
Amazon may have been the first to try dynamic pricing
in the early 2000s, and was met with widespread criticism. Today, it continues
to adjust prices dramatically in an effort to discover the best price to
maximize its revenue and inventory utilization. Walmart, Target, and most other
major retailers do the same.
Dynamic pricing in retail is less obvious than hotels,
but the effect is similar:
- Increased demand results in higher prices
- If sales drop, indicating reduced demand, lower prices are tested
- Weather and other external factors influence price - in different ways for every business
- Inventory levels, particularly clearing out old inventory (also known as markdowns)
- Channels have different willingness to pay, and smart retailers take advantage. Higher prices are ok in a store versus on the web.
- Website traffic also demonstrates increased demand for a product - and may trigger a dynamically higher price
- Perfect Price analyzes all of these factors, and its Price API delivers the right price to test (and can be specific to a group of users, their region, or a specific brick and mortar store).
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