Pricing doesn't always need to be logical but it does need to work because it has a huge impact on a business's bottom line. Raising or lowering prices can be the quickest way to either sell more products or to earn more for each item sold. Either way, it's all good news for a business owner.
In the past, all pricing decisions were made manually but now, along with other aspects of business, pricing has entered a brave new world and software has taken over pricing decisions.
This pricing technology is often portrayed as the game changer that will solve all a firm’s pricing challenges. It is not the answer to ALL challenges but is certainly a vital tool to help a company maintain its pricing strategy over the long term.
Could this really be the golden era of pricing?
The dynamic pricing monetisation model probably heralded the golden era of pricing. With dynamic pricing a price fluctuates based on factors such as time of day, season, weather conditions, supply and demand – all of which impact on a customer's willingness to pay. The pioneer of dynamic pricing has been the airline industry, changing ticket prices based on the time of booking and demand.
With rapid advancements in data collection and analytics technologies, other industries now use more complex algorithms to frequently adjust prices, Uber being the prime example.
Uber ties in prices to the real-time demand and supply of taxis. They increase their prices during rush hours, which in turn attracts more Uber drivers onto the road to meet the demand. Customers are also more willing to pay higher prices for the benefit of sitting in the back of a taxi for their journey, rather than waiting in the rain for public transport.
The biggest triumph of dynamic pricing is that it boosts the monetisation of fixed and constrained capacity, clearly exemplified by the travel and hospitality industries. Airlines and hotels don't want expensive, costly-to-maintain assets like jets and buildings operating with empty seats or rooms.
Dynamic pricing allows the adjustment of prices to monetise unused capacity or the ability to raise prices if capacity is fully constrained. The more volatile the demand the bigger the benefits from dynamic pricing.
Sports teams, entertainment venues and theme parks have started to use dynamic pricing methods, too, taking their cues from airlines and hotels to fine-tune a range of ticket offers that ensure they fill as many seats as possible.
Amazon, the world’s largest online retailer, adjusts countless prices every day. Canny shoppers have learned to hold-out for bargains with the help of sites such as CamelCamelCamel.com, which analyses Amazon price drops and reveals the best bargains.
Bricks and mortar retailers can't compete with the agility of their online competitors but “smart shelves” are now appearing in the UK, with digital price displays that allow retailers to offer deals at different times of the day, along with product information.
Dynamic pricing should be considered when demand and price elasticity in your market vary significantly. You will be fully
If your supply is constrained or fixed then it might be sensible to seriously consider dynamic pricing. The only downside to dynamic pricing is that it may irk your customers if they feel they're being taken, figuratively, for a ride.
Dynamic Pricing in Supermarkets
Some supermarkets have applied dynamic pricing at the individual customer level, offering personalised pricing based on repeat purchases. Frequent buyers of a product get a lower price to encourage further purchases; people who have not bought this product before, or buy it less regularly, will pay a higher price.
Supermarkets are beginning to change their product prices depending on the day, time, season or demand with the introduction of electronic price labels.
For example, Tesco prices products higher in the evenings because high-income evening shoppers tend to be willing to pay more (particularly if they are on their way home after work).
These electronic labels can convey information about stock, incorporate social media reviews, and even connect with smartphones to send customers targeted promotions.
Electronic displays are operated remotely using wireless technology from a retailer’s HQ. Using surge prices and electronic displays will provide a deeper understanding for retailers into the products they sell, the effect price changes have on shopping habits, and the benefit of on-shelf reviews to sales.
Coca-Cola has already been using location-based dynamic prices in some US shops. They use the Google Cloud platform to send videos and discount coupons through smartphones to customers that are already in an
Coca-Cola is able to target customers based on online browsing habits and spending profiles, thereby achieving the most personalised and successful location-based marketing yet.
Sainsbury’s, Morrisons and Tesco have all trialled electronic pricing systems in select stores, pre-empting a complete switch to dynamic pricing across their stores. Marks & Spencer's recently trialled selling sandwiches at a discount early in the morning in order to encourage their customers to buy their lunch before the rush of lunchtime.
A full conversion to electronic pricing will mean that supermarkets will not only be able to respond dynamically to demand shifts but they will also be able to accurately analyse customer buying behaviours to boost the performance of certain products.
There is certainly a current 'push' for dynamic pricing to be implemented within retail. According to European Analyst Neil Mason of Mintel, the retail industry needs to become quick, efficient and more responsive to the marketplace.
Andrew Dark, chief executive of DisplayData, one of the world’s leading suppliers of electronic shelf labels, confirms how the demand for electronic displays has increased in the UK and predictions show that over the next five years, most major retail outlets will change to this new system of electronic pricing displays and dynamic pricing.
Dynamic pricing, says Ariel Ezrachi, director of the University of Oxford Centre for Competition Law and Policy, is simply a way for businesses to respond quickly to market trends, and thus is within the bounds of what consumers already accept as market dynamics.Very soon
The golden era of pricing has well and truly begun.
Monetizing Innovation by Madhavan Ramanujam and Georg Tacke, 2016
Get The Price Right by Sahaj Kothari, 2015