How Dynamic Pricing Can Make your Product More Exciting
A lot has been written lately about the power of Dynamic Pricing, that is, using a number of different factors to determine the practice of charging different costs for the same product at different times, or under different conditions.
Commentators have been approaching this marketing strategy as if it’s brand new, but of course, it’s been around since trade began. Supply and demand, as well as preferred partnerships, affects the price we charge — even haggling is a form of dynamic pricing.
However, if we fail to see just how much Dynamic Pricing is written into our social DNA we run the risk of getting it very wrong or labeling it as unethical. So here, I want to look at a few good and bad examples of Dynamic Pricing, so we can see the benefits more clearly.
Why we use Dynamic Pricing
The three biggest reasons merchants tend to use Dynamic Pricing practices are supply and demand (customer flow), revenue generation and price comparison (competition). However, there are many more and better reasons why you should use Dynamic Pricing. Let’s take a look.
Dynamic Pricing can be exciting
Customers love a bargain and the classic Dynamic Pricing tactic of the ‘Mid Season Sale’ is an example of this. But these days, every shopper knows this method is rolled out when the stock stops moving — ipso facto making it less attractive. So how else can you help buyers engage with fluid pricing?
One company The Stock Exchange Bar may have hit on a way. The Mumbai based cocktail bar with almost 20 branches is the world’s first pub chain where the drink prices change all day (and night) long. At the beginning of trading (when the pub opens) all beers and spirits start at a base price but as people start buying and trading via an app, the laws of demand and supply take over. The more people who buy the higher the price, meaning customers may have to look to other drinks to get a bargain. But don’t worry, this market crashes once a day so customers can purchase at rock bottom prices again.
Make Dynamic Pricing empowering
The above model works well, encouraging customers to buy more, but for many merchants, the customer doesn’t want to buy more — more regularly, yes, but not more. Take for example a meat counter at the supermarket. Meat, and fish in particular is naturally dynamically priced based on supply, but merchants can empower regular customers to stay loyal to their supplier by offering price incentives. This means offering a loyalty system where the buyer can see two prices, one for the member and one for the non-member.
The key to success here is transparency. No one feels empowered if they don’t understand the pricing system. Dynamic Pricing in this context isn’t about excitement but reassurance. Loyalty suggests the meat counter can plan its purchases more effectively. The price fluidity may be there to
encourage people to buy, but it appears to be a practical measure too.
And when Dynamic Pricing goes wrong
Right now, the king of Dynamic Pricing is the Internet retail giant, Amazon. Using an algorithm which watches the pricing changes of products listed by humans, the site virtually adjusts its own prices. So when face creams, for example, start being listed for less, the represented brand’s own offerings are altered.
But not every product in their stable works well with Dynamic Pricing especially if the price instability becomes too obvious. No customer likes to feel like they’ve got a bad deal or paid more than their friends or more than last time. Merchants who fail to offer a stable price run the risk of alienating customers. There is also the risk of entering the ‘race to the bottom’. How low can you go and do you really want to drag all your competitors down with you? And while Dynamic Pricing will let you go back up again, there’s the problem of customers waiting for that low-low price they had before. This waiting is a time they might use to move to a new product.
There is also Pricing Discrimination to consider. This practice is Dynamic Pricing but it uses tactic customers aren’t comfortable with. For example — the same razor sold to men or women in a different color may be more expensive for the woman because research show’s a woman is willing to pay more. Well, it’s easy to see how that might lead someone to buy from the competition. But what about an airline ticket based on your cookie saved previous Internet searches for hotels? After all, if you’ve already bought the hotel, you’re going to be truly committed to buying that flight to go with it! But the trick to making a triumph of the practice of Dynamic Pricing is easy.
Let the customer decide
Probably the best rule of thumb in Dynamic Pricing is to let the customer decide how much they want to pay. This may sound counter-intuitive but it’s a system used successfully by many (including the Stock Exchange Bar). Let’s take the example of the airline ticket again. Dynamic Pricing can be seen at a customer buying level in relation to many choices. For example, Best, Cheapest, Fastest. Each option is good but each has a different price. Want an even cheaper price? Book ahead, fly on a Tuesday — all these options put the price in the customer’s hand.
The take away from all this is — Dynamic Pricing is more than just supply and demand, revenue, and competition. It’s about building an enjoyable and transparent system, one, with which your customers can really engage. And in the seller and buyer relationship, Dynamic Pricing can work well giving you the opportunity to communicate more with your target audience and build loyal customer followings.
