Dynamic Pricing

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.

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

http://www.artsjournal.com/worth/2013/02/why-is-dynamic-pricing-so-rarely-used/

http://www.iprospect.com/blog/featured/dynamic-pricing-an-old-practice-is-making-a-comeback-online.html

http://www.csmonitor.com/Business/Saving-Money/2013/1104/Everything-you-need-to-know-about-dynamic-pricing

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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Bacteria and lizards too can play Rock-paper-scissors!

Game Theory provides the foundation for understanding competition in industries with a few producers. Simply speaking, it is a study of strategic decision making. There are 2 types of Games: 1 stage or 2 stage. In a 1 stage game, each participant makes all of his choices before observing any choice by another participant. A very common example of a 1 stage game is ‘Rock-paper-scissors’.

Overview

Rock-paper-scissors is a hand game usually played by two people. It is a game based on random selection like throwing a dice or flipping a coin where the two participants need to make one of the three hand gestures randomly – rock, paper and scissors. Rock represented by clenched fist; paper represented by an  open hand, fingers touching and the third gesture, scissors, represented by two fingers extended and separated. The objective is to select a gesture which defeats that of the opponent. The rules of the game are- The "rock" beats scissors, the "scissors" beat paper and the "paper" beats rock; if both players throw the same shape, the game is tied.

We are not alone to play Rock-Paper-Scissor !

And we thought only kids play it right! Well the amazing thing is nature has evolved its own strategies to make use of this game. Certain species in nature use this game to allow each of the genetic variants to co-exist with equal advantage. Two such species are known to us- Common side-blotched lizard and certain bacterial species but nature may have many such species which use this strategy for survival which are yet unknown to man.

Common side-blotched lizards have evolved a very interesting adaptation to allow all of its genetic variants/morphs to equally survive. And how does it do that? Well by using our very own rock-paper-scissors game in mating! Male side-blotched lizards exhibit distinct throat colorations, and can be divided into three different categories – orange, blue, yellow. Orange-throated males are very aggressive with lots of females in a big territory. Blue-throated males are less aggressive and guard a single mate in a small territory. The yellow-throated males are particularly clever – they can mimic side-blotched females. Thus by feigning as a female they can sneak into others territories, particularly orange-throated males, and steal their mates. Similar to rock-paper-scissor games, orange beats blue, the orange-throated males being more aggressive. Blue beats yellow as it guards only one female, they are better at catching yellow-throated sneaks. Yellow beats orange, the yellow males can easily mimic as a female and enter into the orange-throated males’ territory and steal mates. Just as in the rock-paper-scissors game, each sexual strategy has advantages over one competitor and a vulnerability to another, so that all strategies have a reasonable chance of prevailing.

The same survival strategy is also used in certain bacterial species too. They exhibit a rock-paper-scissors strategy when they engage in antibiotic production which again allows different genetic variants to co-exist. This is how the rock-paper-scissors game strategy is used - antibiotic-producers defeat antibiotic-sensitives; antibiotic-resisters multiply and withstand and out-compete the antibiotic-producers, letting antibiotic-sensitives multiply and out-compete others; until antibiotic-producers multiply again. Thus the cycle continues and each of the genetic variants has equal opportunities at survival.

With these examples, we can see that nature has up its sleeve its very own rock-paper-scissor game to allow for the co-existence of various genetic variants.

Conclusion

                There have been programming competitions for algorithms that play rock-paper-scissors. Algorithms based on Markov Chains have been developed for its strategy. Also there has been a World Body for this game which standardizes the set of rules for international play, called World Rock Paper Scissors Society. And yes, there are international tournaments for this game, which apart from attracting widespread media attention and participants, have also been broadcast live on TV. And we thought it was a kid’s game.

References

Alonzo, S.H.; Barry Sinervo (2001). "Mate choice games, context-dependent good genes, and genetic cycles in the side-blotched lizard, Uta stansburiana". Behavioral Ecology and Sociobiology 49 (2-3): 176–186

About the Author

Sayantan Das is a PGDM student of 2013-2015 batch. He can be reached at sayantand2015@email.iimcal.ac.in

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Challenges faced in Food Processing Industry with a focus on Rice Mills

Much hullabaloo has been raised both by intellectuals and the media over the recent approval of Food Security Bill (September 12, 2013). Many have claimed that such a law would aggravate the food price inflation, add subsidy burden to the already weak economy exacerbating macro level inflationary pressure. Another view that came out in the debate was the shift in farm produce towards cereal production and away from other farm produce such as proteins. This behavior is attributed to the fact that our current food processing industry primarily the rice mills are not optimized and such a shift is inevitable in order to sustain the large population. Thus an attempt has been made to understand the major challenges faced by the Food Processing Industry with a focus on the Rice Mills.

Overview

Rice is the major staple food and is considered more than just food as it has a strong cultural connotation, not just in India but the whole of South Asia. India is the second largest producer of rice in the world with a production of around 104.2 million tonnes in 2012-13 and exports amounting to 10.3 million tonnes.
Food processing industry is said to be the connection between the agriculturists/producer to the consumers. It is a value-add to the food commodity and provides convenience to the consumers. It also provides the producers with a ready business market and helps them by fetching a good price for their produce. The rice processing is fairly simple and is as old as rice consumption itself, obviously! The rice milling has evolved from mortar and pestle to the current day highly advanced machinery available to do the job. But have the Indian rice millers actually adopted them?

Issues in modernizing Rice Mills in India

Let’s discuss the challenges faced by the Indian Food Processing Industry in modernizing the rice mill industry in India.There are more than 1 lakh rice mills in India. Since the yield rate of full rice grain needs to be maximized the rice mills need to be modernized  But Huller mills, rubber shellers and their combination- the types of rice mills which yield high broken rice component are still very prevalent. To encourage modernization  Government of India has repealed the Rice Milling Industry Act facilitating setting up of modern rice mills without government permission. And also, subsidies are being provided by the government for setting up of rice mills and also the grants are disbursed in a much decentralized way by roping in many scheduled banks to ease up the process.The Ministry of Food Processing Industries states-

“The Ministry of Food Processing Industry has re-opened the Flour Milling, Pulse Milling and Rice sector w.e.f. 01/04/07 which was closed since 31/3/04. Under the Plan Scheme of the Ministry grant will be provided up to 25% in general areas and 33.33% in difficult areas up to a maximum of Rs. 50 lakhs and Rs.75 lakhs respectively on Plant & Machinery and Technical Civil Work for setting up/modernization /expansion of Food Processing Industries.”

The modernization of rice mills accelerated because of the high demand of the polished rice which led to the natural death of the traditional rice mills.

However the cost of setting up a rice mill is very high. NABARD quotes a very conservative figure of about 52,76,600 INR for setting up the rice mill. But the actual costs can run up to 5 crores. With the profit margin of a rice mill running as low as 5 – 6%, it doesn't makes a  lucrative business to be taken up.

Also the power requirements are about 100 HP and requires a reliable water supply for producing parboiled rice or operating sortex polishers. Although the number of labors employed in a modern rice mill is substantially low, owing to greater degree of automation, but the stricter labor laws have increased the labor costs.

Besides, the most important point that affects the rice mill industry is the monsoon. The supply of paddy can be affected by a low monsoon or crop destruction by floods bringing in a high level of uncertainty. Also the location of paddy cultivation and rice milling tend to be concentrated.

The greatest culprit has been the fragmented land holdings which leads to the inconsistency in the rice quality. The changes in quality creep in even when similar resources are utilized in cultivation like fertilizers, seeds, etc. Cooperative Joint farming societies should help keep this to a minimum.

Conclusion

The food processing capability in rice sector has a lot of potential for improvement. However it is necessary that the above challenges are addressed so that India utilizes its rice production capacity to its optimum.

About the Author

Varsha Kalyankar K. is a PGDM student of 2013-2015 batch. She loves visiting new places and is a big time foodie. She can be reached at varshak2015@email.iimcal.ac.in

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