DynamicMktg

Dynamic Pricing: Here today, gone today.
By Paul Herbig

Pricing is one of nature’s hidden wonders. We all see it but few of us understand it. And perhaps it is rightly so. To paraphrase an ancient wise man, “ You do not want to see legislation, sausage or pricing being made. It is not necessarily an appetizing process and you will be a changed man forever more as a result.”

With the advent of the Internet and vast computational capabilities, a phenomenon called dynamic pricing has arisen, mighty in scope and tremendous in its capabilities to change habits of every American and business. Dynamic pricing. Like it or hate it, it is here and for the rest of time. Dynamic Pricing is the practice of charging different customers different prices for the same product or service . . . at the same time. It has been typical marketing practice to charge different prices (at different times) . . . the retail markdown, the seasonal sale, the inventory clear-out are all examples of this. What makes Dynamic Pricing different is that prices offered to different customers at the very same time could well be considerably different. Some examples include charging travelers different fares for the same flight or same hotel accommodations, setting prices for sporting events based on the quality of the opponents and charging borrowers different interest rates based on their credit history. From a company perspective it is full of promise and excitement, yet fraught with risk. Dynamic pricing gives marketers the flexibility to pursue margins and sales volumes simultaneously I(especially true in settings with high uncertainty regarding market condition), and that increases profits. Companies that experiment with dynamic pricing could lose a few customers but the gains from the many, many customers who don't care would far outweigh the losses.

It is both new and old. In some ways, Dynamic Pricing is as old as commerce. Think of the Arab bazaars where buyers haggle with merchants over the price of spices and rugs. One buyer could well get a price considerably different from another buyer of the exact same good within minutes or seconds of each other. What makes it different is with the advent of technology, Software programs using sophisticated statistical models and algorithms can crunch all the factors that go into determining something's price, including market trends, competitors' prices, the cost to produce and sell the item, and the customer's demographic information and past purchasing history. Companies can now disseminate an individual price instantly to the Web, to store, or to customers anywhere in the world at anytime of day. Overstock.com acknowledges the company watches how long you linger on the site and how much you spend which could determine whether you will see a notice of a liquidation sale or a new shipment of premium priced items

An urban myth had Coca-Cola developing the ultimate in a dynamic pricing vending machine. The machine could sense the outside temperature, the number of cans of each brand still left in the machine, the time of day and was programmed to factor in how many nearby vending or retailing outlets existed. Then it supposedly would change the price instantaneously accordingly. That is, if it were hot outside, the machine isolated and how few cokes were left, the machine would register a significantly higher price than if it were cold and stocked full.

You too can check out dynamic pricing on the web. If you already have an Amazon or other online retailer account, create a second email address, than order the same item from your regular account as you would from your new address. Preferably do it as close together as possible. Are the prices the same? If not, odds are that your new account was provided a lower price (as inducement to become a new customer ). Or even go to a site, check out the price and return moments later and you may well get a totally different price..

Yes it is here to stay. What can customers do? Compare often. Shop carefully and become more savvy with the technology race. Marketers beware. Dynamic Pricing offers higher margin but at a cost of consumer discontent. What is the value of a lost customer to you? And more to the point, how important is your reputation? Do you want to be perceived as the ever shifting (and shifty) company or one that is consistent and fair to all? The choice is yours.





One is to make customers who pay a higher price feel they're getting more for their money. For instance, travelers are willing to pay hundreds of dollars more on first-class plane tickets even though the ticket doesn't get them to their destination any faster than the folks flying economy. What it does get them are perks such as complimentary drinks and more comfortable seats. Dynamic pricing also lends itself to products that are purchased infrequently, such as cars or luxury goods, because consumers are less likely to remember how much they paid or to compare prices with friends. Finally, segment customers appropriately and don't charge higher prices to those who are price-sensitive. Otherwise, you'll definitely alienate customers.