Amazon, Airlines, Gas stations and Hospitality. What is the common aspect of all these industries? They are using Dynamic Pricing. But what do we even mean when we say Dynamic Pricing? Let’s shed some light into this mystery and find the crucial difference of Dynamic Pricing and Smart Pricing.
Dynamic pricing has a tendency to lead to crude and arbitrary price variations that can leave consumers feeling hard done by. With modern data analytics and Machine Learning, we should be looking to pricing approaches that are more strategic, intelligence-led and truly agile. It’s time to think smart about how we price.
Imagine a situation where there is a concert you really want to go to. You know demand is going to be sky high and the tickets won’t come cheap. But, just before they go on sale, the promoter announces a small run of half price early bird discount tickets will be made available. Great! You can see your favourite star without worrying too much about the hole it will leave in your wallet.
On the morning the tickets are released, you log on to the ticketing site, choose the early bird option, enter your payment details – and then get the spinning loading icon that tells you the transaction is waiting to be processed. Nothing happens. The page is completely frozen as the site tries to deal with the intense rush of sudden traffic.
Five, ten, 15 minutes pass by. After half an hour, something happens – but rather than confirming your purchase, you get a message telling you that the early bird discounted tickets have sold out, and you will have to pay full price. How unfair! You were online ready to buy right as they went on sale, and now you’re going to have to pay double!
This is an example of bad dynamic pricing in action. It is a common ploy in the entertainment industry, where vendors use discounts on fixed numbers of tickets to drive sales volumes. However, it is very different to how dynamic pricing is understood and applied in retail, or in energy pricing, or in other sectors like travel, hospitality or even public transport. The truth is, there is no single accepted definition of what dynamic pricing is, or how it works.
All that dynamic pricing really tells us is that vendors have the power to change pricing to achieve certain effects – which is pretty obvious. All too often, these changes are applied in quite crude, arbitrary ways, without enough thought about the overall impact, or whether they really serve strategic business goals. Yes, discounting a few tickets for an event when they go on sale might drive up early sales volumes. But how did the vendor decide on the number of tickets to sell cheaper? Was any thought given to the feelings of people who missed out and had to pay more? Is there another, less controversial way to create an early buzz around the launch?
To avoid these potential negative consequences, businesses need to think more carefully about the how, why and when of altering prices – and also about how much of it customers can see.
However, let’s be fair to businesses for a moment – the intentions behind dynamic pricing might be sound. What often goes wrong is the implementation, because that’s when you run into all sorts of technical challenges.
Dynamic pricing essentially comes down to varying your pricing for a product to achieve a particular business goal – increase revenues, increase demand, increase online traffic, shift demand to off-peak time periods and so on. But the tricky part is how you make those price changes. Most ERP systems, ecommerce platforms, ticketing systems and so on support ‘dynamic pricing’ in as much as they allow for price changes to be automated by applying certain rules or conditions. But by and large, these features are fairly basic and limited to discount or quota structures only.
So with the early bird ticketing example, the promoter might want to apply a pricing strategy that is a little more sophisticated than “sell the first 500 tickets at half price” or “discount all sales in the first hour by 25%”. They might want to do something that makes every customer feel like they are getting a good deal, perhaps by reducing the discount incrementally as more and more tickets are sold to protect profits, but still giving a little something. But their pricing system only allows them to set straightforward volume or time-based rules and there is no support to determine how these rules should be set.
However, things are changing. In the data-dominated digital age, analytics and machine learning technology has progressed to a point of sophistication where it can decipher intricate patterns from vast unstructured data sets, predict future outcomes and recommend actions for optimal outcomes, all in real time. Applied to pricing, this finally gives vendors a direct continuum from their strategic pricing objectives to an optimised and automated way of actioning them.
In practice, dynamic pricing all too often just means altering prices according to a few basic rules. Smart pricing means embracing a fully agile approach which uses data-led intelligence to find the optimal balance between intended business outcomes and the real-world effects of price changes.
th!nkpricing is a brand of Smart Pricer. We are making professional pricing accessible to everyone by offering a platform to understand, simulate, and optimize your pricing with machine learning-driven algorithms and advanced demand prediction.
Want to stay in the loop and become a #pricinghero? Subscribe to our thinkpricing newsletter to not miss any upcoming blog posts.