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Dynamic Pricing: An Old Practice is making a Comeback Online
09
Aug

By: Scott Randel | Paid Search Strategist

Before the Internet, Comet, a British retailer used dynamic pricing to maximize its profits by setting different prices for appliances in various regions of the country. When their business expanded online, the strategy of offering dynamic pricing based on regions was crushed. The Internet broke down doors in comparison shopping by allowing consumers to compare prices easily, which, in turn drove these prices down.

Some businesses were able to transfer their dynamic pricing strategies into the online world. For example, airline companies still price dynamically based on time and availability. Using a complicated algorithm that factors in the time before the flight and available seats on that flight, they offer unique prices that match current demand and supply. This is why you should never ask the person next to you what they paid for their flight; one of you will be upset.

Failed Case Studies

As the Internet becomes more sophisticated, new opportunities to leverage dynamic pricing present themselves. However, when it comes to implementing these new opportunities, there is a fine line. Many consumers feel dynamic pricing is not fair. Amazon is well aware of this issue; in 2000 they tested selling DVDs at different prices based on which browser a consumer was using. Consumers did not like this and Amazon eventually refunded their customers who had paid more. Amazon no longer discusses their pricing strategy.

Coca-Cola tested dynamic pricing in vending machines where prices would fluctuate based on the surrounding temperature. Their theory was a soft drink would be worth more when it is hotter outside and demand for soft drinks would decrease if it were cold outside. The idea did not resonate well with Jeff Brown, who noted in The Philadelphia Inquirer that Coca-Cola’s test is the “latest evidence the world is going to hell in a hand basket.” Luckily, Coca-Cola abandoned the idea.

Current Dynamic Pricing Strategies

Fast forward twelve years and Orbitz is using a dynamic pricing strategy similar to Amazon. Instead of offering the same product for different prices, they are serving different products for different consumers based on their operating system. Orbitz noticed Mac and PC consumer bases have different purchasing behaviors, so they adjusted their search result pages to better reflect these preferences. In other words, they are optimizing their landing pages by device for better conversion rates. Some consumers did not react well, but the outrage was less than in the Amazon case. Companies refer to these techniques as “personalized experiences,” probably in an aim to avoid upsetting consumers by casting the practice in a positive light.

Dynamic Pricing Vendors

New technology allows companies like Orbitz to adjust prices in real-time to meet the current demand and supply of the market. Companies including Rich Relevance and Qcue offer unprecedented ways for e-commerce companies to adjust pricing and maximize profits. Barry Kahn, CEO of Qcue, has seen clients increase revenue by an average of roughly 30 percent in high demand situations and approximately five to 10 percent in low demand situations. “It’s really hard to have better info on what your product is worth and sit on that,” states Mr. Kahn.

Some argue personalization technology can be too good, to the point where it makes the consumer feel uneasy. One of Rich Relevance’s clients, Target, got into hot water with a local father when the technology discovered his teen daughter was pregnant before he did and, as a result, sent her coupons about baby diapers and baby supplies.

When Does Dynamic Pricing Work?

There is a thin line between what is acceptable in terms of dynamic pricing and personalized experiences. According to Werner Reinartz, a professor at INSEAD in France, for dynamic pricing to be successful these 5 conditions must be met:

1. Customers must have a difference in their willingness-to-pay.
2. The market must be segmentable.
3. Limited potential for arbitrage.
4. Cost of segmenting and policing must not exceed revenue increases due to customization.
5. Must not breed violations of perceived fairness.

With fixed pricing, businesses can be either missing out on profit or potential sales depending on consumers in the market. Next, businesses need to figure out a way to segment consumers by their willingness-to-pay. In Orbitz case, it is by device, while in the airlines case it is by time. If consumers can buy lower priced goods and sell them for profit, the company is missing out on potential revenue. New technology is allowing the cost of implementation to not exceed the increased revenue from implementing a dynamic pricing strategy.

Lastly and most importantly, the dynamic pricing strategy cannot be seen as unfair by consumers as it was in the Amazon case. Sometimes there is an emotional barrier to break before consumers will accept paying different prices.

Successful Case Studies

The committee organizing the London 2012 Olympics Games did a phenomenal job of offering dynamic pricing to maximize profits from the ticket sales for the Olympics Games. They released pricing tiers wherein the public could sign up for the tier they would like to purchase for each event. The number of seats in each tier was not fixed, so they simply adjusted the number of seats to fit the demand for each pricing tier.

Major League Baseball has also done a great job adopting dynamic pricing in ticket sales processes. The San Francisco Giants did a small dynamic pricing test in 2010 for 2,000 seats in the furthest corners of the stadium and, as a result, was able to increase revenue by $500,000. Although dynamic pricing can be seen as unfair at times by consumers, companies will continue to push the boundaries to maximize profits. Even the college football industry, specifically University of South Florida, is experimenting with dynamic pricing.

The Future of Dynamic Pricing

As Comet experienced in the early days of the Internet, the web broke down doors by destroying old dynamic pricing schemes. Today, developments in technology are providing new ways to implement dynamic pricing strategies. Multiple industries are utilizing dynamic pricing to increase profits and improve sales. The airline industry and now professional baseball have mastered the art of dynamic pricing to the point where consumers expect to pay different prices for their products. It will be increasingly difficult for firms to sit on information about what their products are really worth. Thus, with the continual emergence of new technology, expect an increasing number of online firms to experiment with dynamic pricing.

 

 

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