April 30, 2020
Uncertainty. Impact. Change. Speed. Risk. Loss.
Fear and anxiety have taken over the comfort zone of our personal lives. Throughout the pandemic, making any simple decision has been a difficult, if not nearly an impossible balancing act if we want to frame them within a short/medium/long term perspective. We’re all in this unrecognizable survival mode where everything has come to a standstill. If we translate this into the business world, it doesn’t look much different, unfortunately.
As Greek philosopher, Heraclitus outlined for us more than 2,500 years ago with his concept of Panta Rhei or ‘everything flows,’ the substance of the things we see is in constant change. In other words, all things are in continuous flux. This has never rang more true than today.
Business as we know it is undergoing significant change right now. More than ever, it’s a matter of survival that organizations respond with a framework for adapting to evolving market conditions. Dynamic pricing is one way to ensure a steady revenue stream and lifeblood for survival.
What is Dynamic Pricing?
Dynamic pricing is the concept of selling the same product at different prices to different groups of people and adjusting to their needs overtime, regardless of price elasticity considerations. In business terms, it means combining your frequency and points of differentiation.
In B2B negotiations, complexity is not only driven by the number of potential combinations but also the definition of pricing based on how many factors contribute to the actual final price a customer ends up paying, after including On/Off Invoice adjustments such as negotiated discount, special prices, promotions, compliance rebates, volume incentives, and other concessions.
Traditional dynamic pricing solutions are often a complex framework which combines user- defined business rules that are coded in a macro spreadsheet and/or buried within the backend access sequence of an obscure ERP environment. These solutions have become obsolete in today’s business climate however as companies react to customer demands for reliable, timely, smart experiences. Complicated and cumbersome hasn’t worked for some time now.
Ensuring the Right Price for the Right Product at the Right Time
There’s no silver bullet to defining the best pricing strategy; each approach has their strengths and weaknesses.
- Cost-based pricing is margin driven, scale price agnostic but human centric
- Market driven pricing uses market share and/or competitive information but it’s dependent on accurate and timely data
- Automated rule-based pricing combines different rules with a varying range of automation and supervision
- Value-based pricing relies on customer perception and willingness to pay which is very valuable but challenging to accurately capture and maintain
In addition, business rules and strict policy management is not adequate to compete with current market offerings that are designed to maximize every potential business transaction by combining hundreds of inputs automatically with little user supervision.
Dynamic Pricing Should Leverage AI and ML
Dynamic pricing solutions are also dead if they are not enhanced by an algorithmic pricing engine enriched with unsupervised technology. Optimized price is typically derived from willingness to pay and machine learning functions that are driven with different degrees of supervision. The key benefit of AI/ML is it enables scalability of pricing decision by leveraging millions of actual transactions and all available data within the enterprise.
- Historical pricing drives demand/consumption of existing products
- Willingness to pay is derived based on data structures justifying the transactions
- Science algorithms processes pricing and non-pricing factors to derive optimal pricing
- Realized price vs optimal recommended price is captured by algorithm to account for latest repricing results which in turns allows for a more holistic portfolio perspective beyond a SKU view
Getting Started with Dynamic Pricing
Attaining pricing maximization is possible by using all the different forces that affect the buying/selling transaction.
- Leverage timebound pricing conditions as much as possible, including promotions, scale pricing at the time of order, volume driven incentives, etc. This will ensure you can drive prices up or down based on time and compliance. This might not be popular in certain industries but there’s no reason if you’re launching a new product, service etc. you can’t use dynamism in your price/value offering.
- Leverage on/off invoice discounts. This will help you hold the line on how much value you are giving upfront vs tying it to compliance.
- Be transparent, upfront and careful about your dynamic pricing perception because it can affect your brand. Let the market self-regulate itself and be complicit with price gauging techniques…since there are some buyers that not only buy on price but also on brand values.
Heraclitus reminds us, “All things are in motion like streams, All things are passing, and nothing abides.” And so should be this time of uncertainty and your price.