Dynamic pricing – Current realities
Every person is willing to
pay a specific price for a product or service. Some people can pay high price
while others can pay low price. So, instead of going for fixed price, why not
go for dynamic price through which we can ensure that no money is left on table
and more customers can be served? The idea is to change the price based on time
of the day, demand and season. Through dynamic pricing, the cost of airline
ticket to electronics changes from week to week.
Dynamic pricing – Current realities
Advantages
Dynamic pricing not only
helps the companies but also consumers. Companies in hospitality industry can
raise their prices in peak season and keep minimum price in off season.
Retailers can raise the price of product in high demand and lower price for low
demand products. Consumer, who could not afford a fixed price airline ticket,
can travel via airline through dynamic pricing. The peak electricity load can
be reduced by charging more during peak hours and low during other times. The
electricity utility corporation would need less capacity to cater to its
consumers which would drive down their cost and consumers can reduce their
bills.
Limitations
In spite of many advantages of dynamic
pricing, it is easier said than done. There are many factors which should be
considered before going ahead with dynamic pricing. One of the factors is a signal
sent to consumers. By charging high price for in demand products, we are
telling consumers that the products which are discounted are unwanted. It would
be a self-fulfilling prophecy and the demand for cheap/discounted product would
go down.
Another factor would be “menu costs”.
It is difficult for managers keep track of demand, adjust prices and post those
prices. If the manager was running a hotel, he would have to revise and reprint
the menu on weekly basis which would raise the cost. Industries like airline
and movie don’t have menus, so dynamic pricing could be easily implemented
there.
The third factor would be consumer
perception. For example, Amazon tested selling DVD’s at different price based
on consumer’s browser. Consumers did not like it and Amazon had to refund the
consumers who had paid more. Coca-cola tried dynamic pricing based on
surrounding temperature. The idea was to charge more in hot weather due to high
demand and low in other case. The idea did not resonate well and was abandoned.
Some companies learnt from this experience and have developed better
strategies. Instead of offering same product for different prices, companies
like Orbitz are serving different products for different consumer based on
their operating system. By calling it “personalized experience”, they have been
able to manage consumer perception.
The next factor is based on behavioral economics.
Consumers place a lot of value on predictability. They are guided by “loss
aversion”. If a product is cheaper than expected, one would be a little happy
but if it is costlier than expected, one would be very disappointed. This gives
firms some incentive to keep the prices stable.Effective Application
Dynamic pricing can’t be implemented
in any industry and it should be implemented effectively. The customers should
be willing to pay for the additional service/feature. We should be able to
locate these consumers. Multiplexes locate them based on time of the day. Cost
of implementing dynamic pricing like menu cost or software cost should not
exceed the increased expected revenue from dynamic pricing. Apart from airline
industry, major league baseball has successfully implemented dynamic pricing of
ticket. One of the team was able to raise the ticket revenue by $500,000.
Conclusion
Dynamic Pricing strategy is
very helpful in raising revenue, profits and getting the highest value for the
product. It is being adopted at a quick space in various industries. However,
effective execution of this strategy is critical in long term success of the
firm. Various behavioral and cost factors should be studied before
implementation. Dynamic pricing offers lot of opportunities but one has to
implement it effectively and at a right place to get the best out of it.
References
About the Author
Sujay Deo Shashank is a first year PGDM student. He can be reached at deos2015@email.iimcal.ac.in
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