July 27, 2020
With all the talk surrounding the use of Big Data, Machine Learning, Deep Learning and Artificial Intelligence, dynamic pricing has become a recurring topic among enterprise executives who are looking for ways to navigate today’s turbulent economic times. In theory, the benefits of dynamic pricing are enormous. Imagine having the ability to maximize the profit made with each and every customer. What company would not want to implement this type of methodology, right?
While the notion of ‘static price’ is fast fading, Dynamic Pricing is not recommended as a quick fix for every company however. It’s critically important you first master pricing basics and understand the pros and cons of this important pricing strategy. As we know, price touches everything and everything touches price. A poorly designed pricing strategy can cause damage to the company’s margin and, even worse, break the trust relationship between customer-brand.
I recently discussed dynamic pricing in a post on LinkedIn. I received very interesting comments from pricing colleagues around the world and I would like to share the five most important points of this discussion with you here:
- Willingness to pay. A major challenge in implementing a dynamic pricing strategy is to first find the best price for each customer. Discovering true customer willingness to pay is the key here. High prices can scare customers away while very low prices mean money is being left on the table.
- Good data. Another challenge for the successful implementation of dynamic pricing lies within data. Clean and well-structured data is absolutely necessary for segmentation and analysis to be carried out. I can say from experience, data quality is often overlooked by companies.
- Differentiation and price segmentation. Differentiation and segmentation is a super important and fundamental step for any company that wants to envision the implementation of a dynamic pricing system. A pricing model must respect value and segmentation mechanisms that have been put in place.
- All prices are dynamic. There is no longer such a thing as Static Price. All prices are dynamic. What changes here is time. Some companies change prices in minutes, others in years. Special thanks to Marco Bertini, Marketing Professor at ESADE for this simple, yet valuable insight.
- Understand your customers. Dynamic pricing needs to be studied carefully by the company prior to its implementation. Prices that change too frequently or in inappropriate ways can break the trust between your company and your customer. In addition, your customer can perceive the existing hidden patterns (such as prices changing from a certain time / date …) and change their behaviour for their own benefit. It is a double-edged sword that must be used wisely.
Don’t casually fall into dynamic pricing just because everyone is ‘supposedly’ doing it. On Linkedin, we discussed several points of view on different subjects however we all agreed on one point: Master the Basics First! Prepare your team, organize the data, and get to know your competitors and customers before even deciding to go dynamic.
Vendavo helps some of the world’s biggest brands orchestrate (and benefit from) dynamic pricing with Vendavo PricePoint. Read how Corning Optical Communications saw how smarter pricing lights the way to improved margins.