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Monthly Archives: April 2019

Revolutionary? The Truth About Dynamic Pricing

Опубликовано: April 18, 2019 в 12:39 pm

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Категории: Blog

Dynamic Pricing has existed for years and years

Marrakech Market on a Wednesday morning. The smell of spices. Lots of people and lots of stuff to buy. I see this collection of beautiful Berber baskets, so I decide to go up to the stand and have a closer look. I am holding this colorful basket when the vendor starts talking to me. He starts telling me that these baskets are handmade by his grandmother. The vendor asks where I’m from and when I say Switzerland, his eyes start to glow. He tells me how he lived in Basel for a couple of years and what a lovely country it is. After some more small talk, I ask him for the price. He says the baskets start at $150. I am a little shocked by the price, so I tell him that I will think about it and maybe come back later…

I continue my walk around the souk and eventually decide to return to the Berber basket vendor. While approaching the stand, a local asks him for the price and he offers him the basket at $80. I go closer to the vendor and he remembered me. I ask again for the price and he said he could not go below $175 since most baskets have been sold.

This ladies and gentlemen is dynamic pricing.

Based on certain attributes, the consumer is offered a different price for the same good. This is also called price discrimination. But, don’t you worry, sellers should never discriminate you based on personal characteristics such as race, sexual orientation or religion. The discrimination is always based on your willingness to pay.

A tip: hide your willingness to pay

Dynamic pricing as we know it today, or in this specific case revenue management, was first practiced by American Airlines in the 1980s in times when airfares were brutally low due to the airline deregulation act (1978) and competition was heightened. American Airlines understood that they would not become more profitable by solely dumping prices for everyone. So they figured that low fares should be accessible only to consumers with a low willingness to pay. These could be filtered out by including certain rate fences.

You have probably purchased a super low-priced ticket before, haven’t you? But of course, there is a trick behind that: first of all, you’re not Swiss, you booked on a Tuesday, 3 p.m and used a cheap Chinese smartphone. Additionally, the ticket is non-refundable. You don’t get to pick a seat. You don’t have checked luggage. You booked ten months in advance. Airlines think if you’re okay with such a low-level service, then sure, go ahead and buy the cheap ticket. But if you want the whole deal then you’ve got to pay more. This is done to make sure that no money is lost on consumers with a high willingness to pay. If you want a low price, make sure nobody knows how much you’re willing to pay. Remember that I told the Moroccan vendor that I am Swiss? Well, he consequently figured I probably have more money than a local buyer. The so-called ideal absorption of purchasing power.

Is dynamic pricing unfair?

Go ahead and ask your seat neighbor on your next flight how much they paid. But don’t blame it on me if it provokes you that they paid a third of your fare. That’s how the game works. However, revenue management is not unfair whatsoever. Now that we’re living in times of big data booking engines know everything about everyone. Yes, dynamic pricing is done with the intention of capturing all consumer surplus and maximizing profits. Nonetheless, you as a consumer can and will benefit from it. You will only pay as much as you want. Sellers never force any price on you. The prices offered are based on meticulously programmed algorithms and if you don’t want to buy it at a certain price, the seller won’t care. They know that this just isn’t the right service for you but somebody else will gladly take it.

Is dynamic pricing ending e-commerce loyalty?

Nowadays, airlines and hotels aren’t the only ones practicing dynamic pricing and revenue management anymore, it has reached e-commerce as well. Amazon is the best example for it. The online retailer has access to an awful lot of data allowing them to adjust prices several times per day with the goal of maximizing revenue. And this pricing algorithm comes with great power. Times are rough for e-commerce. There is little human touch and a high perceived homogeneity between sellers. Thus, price is one of the few – and probably the easiest – competitive advantages.

Imagine this: You’re a loyal Interdiscount customer and want to buy new headphones online. You google the headphones and see shopping ads, one for Interdiscount and one for Mediamarkt. The only difference is the price. CHF 199.– and CHF 179.–. Now, be honest to yourself: how much do you really care about remaining loyal and paying 20 bucks more? Not a whole lot I’m guessing.

Percentage of dynamically priced products at selected online retailers.

Dynamic pricing is everywhere (even offline!)

Dynamic pricing certainly isn’t limited to online businesses. This beer bar in Hannover prices its beers according to their current popularity. The more people want a certain beer the higher the price. Following the classic law of supply and demand in a sped-up manner. An excellent way for the bar to maximize its revenue and on top of that this type of gamification engages the customer and provides a unique experience.  

Data is the oil of the future

No matter which industry you’re in, your data is worth gold! So start using it. You don’t have to change your prices 25 times a day. But if you have data which tells you that the slowest time of the day is between 1 p.m. and 3 p.m. then decrease prices as demand is low. Obviously, the drop in price needs to be communicated. Send people nearby your store push notifications informing them about your deal and you’ll see how fast your employees will be busy!

Go get your competitors’ customers

You’re probably wondering what all of this has got to do with marketing. Remember the 4 Ps? Price, product, place, and promotion. And guess what? Price is the only P generating revenue while the others only incur costs. That’s why we at mindnow believe it’s pivotal to have price under control. It communicates a certain level of quality that a customer can expect. And it is an important tool regarding loyalty. Of course, price should not be the only point of differentiation but it certainly helps to communicate the right price to the right customer when poaching from competitors.

What is your take on dynamic pricing? Have you made any interesting experiences? Let us know in a comment below!

Source image: Brandt, M. (2018, August 7). Dynamic Pricing – der Zeitpunkt macht den Unterschied [Digitales Bild]. Accessed April 17, 2019, from https://de.statista.com/infografik/14991/anteil-dynamisch-differenzierter-produktpreise-bei-online-haendlern/.

Loyalty vs. Retention

Опубликовано: April 17, 2019 в 12:06 pm

Автор:

Категории: Blog

More and more companies around the world are investing in loyalty programs. However, it is almost impossible to distinguish between these programs, which means that their benefits are dwindling. The trick is to create programs that are specific to the customer’s goals and therefore to those of the company. Either way, the numbers speak for themselves: they simply can’t afford “disloyal customers” anymore!

Why do you also need a customer loyalty program?

There are dozens of reasons. I have summarized the 5 most important ones:

  1. New customers become more and more expensive: The acquisition cost of a new customer has skyrocketed and can cost today depending on the industry 5 to 25 times more than retaining an existing customer. The two KPI’s that show the efficiency of your company are the Customer Acquisition Cost (CAC) and the Churn Rate. The CAC summarizes the full costs incurred to gain a new customer. The Churn Rate consists of “Change” and “Turn” – the proportion of customers you have lost in relation to your entire customer base. The success rate for sales to an existing customer is 60-70%, while the success rate for new customers is 5-20%. Competition is increasing. More and more providers are offering an almost identical product. This puts pressure on margins and causes customers to migrate to the competition. Companies today spend a lot of money to acquire new customers. Unfortunately, most companies spend only a fraction of this budget to retain customers over the long term. Loyal customers buy 90% more and spend 60% more per transaction!
  2. Relevant customer data and consumer trends: Companies can use the data for omnichannel, offline and e-commerce segmentation. Get an overview of customer behavior, buying habits and preferences. This information is essential to optimize inventory management, pricing and advertising planning.
  3. Up-selling and cross-selling: As explained above, an organization can use the collected data for cross-selling and up-selling. Possible examples: a) Extended warranties after an item has been purchased. b) Suggest accessories that match the item purchased. c) Grant discounts on related purchases.
  4. Data protection regulations / Spam & advertising filters: The customer is, thankfully, being more and more protected. This makes it more difficult for companies to get new leads and thus acquire new customers. In addition, communication with existing customers’ addresses is becoming more and more difficult due to the constantly improving spam and advertising filters. Customers are also becoming more aware that their personal data is valuable.
  5. Direct customer communication: If you launch a new loyalty program on the market, an app or at least a web app makes sense. In any case, you want to be close to the customer and therefore on their smartphone. Apart from the announcement of new products/services, sales promotions and the like, a loyalty program can be used to view the last purchases, save corresponding guarantees or handle product recalls easily. In the future, it will be irremissible to be able to communicate with customers. Talking is silver, listening is gold!

Who should be loyal to whom?

Are you currently planning a new loyalty program for your company? Then I have a really exciting question for you. Who should be loyal to whom? A study shows that 73% of consumers believe that loyalty programs should be a way for brands to reward customer loyalty. Interestingly, 66% of marketers see the opposite: loyalty programs are designed to give consumers the opportunity to show their loyalty to a brand. Reminds me of something I once read; that 85% of men think they are very good lovers. However, only 30% of the ladies think that they are well entertained in bed 🙂

Loyalty is not the same as retention

Loyalty and customer retention are two different pairs of shoes. Only when you distinguish loyalty from retention you can begin to understand the customers’ experiences, interactions, perceptions and attitudes that drive and influence loyalty.

Customer retention is an indicator of whether an existing customer will continue to do business with you. Loyalty, on the other hand, measures a customer’s willingness to choose your company/brand, indicating their preference for your company over your competitors. Loyalty is a behavioral disposition that indicates that a customer always reacts positively to a brand/company and signals willingness to engage. Loyalty is an attitude.  A customer who continues to do business with you may remain a customer, but may not necessarily be loyal. This distinction is essential.

Loyal customers were found to be…

  • 5 times as likely to shop more than once.
  • 5 x as likely to forgive.
  • 4 x as likely to make a recommendation.
  • 7 x as likely to try out a new offer.

(“ROI of Customer Experience Archives,” 2018)

But what makes your clientele loyal?

A frequently observed reason for the failure of loyalty or reward programs is the excessive focus on transactions: I’ll give you if you give me. Sure, you have to keep profitability in mind, but a loyalty program can be so much more! Used correctly, it’s also a powerful recommendation marketing tool. Build a relationship with your loyalty program members. Listen to your customers and act on their comments. To get the highest possible ROI from your loyalty program, help them love you so much that they become voluntary brand ambassadors.

In another step, consider what makes you personally loyal. What motivates you to give someone your loyalty? To stand up for someone or something? It is also worth making a detour into psychology here. Or more precisely, into the limbic system. Newborns, for example, smile when they are put a cotton swab of sugar solution in their mouth and demand more. The sugar solution is a stimulus that activates or intensifies the desire to satisfy the appetite. The desire and the prospect of reward motivate action. This is ensured by the neuronal reward system in the brain. If we feel joy or happiness, the brain is flooded with messenger substances. This creates a sense of well-being and lets people (re-)act, always hoping to be happy in the end. Conclusion: Look for the sugar stick for your customers. They will always want more and return to you.

How can you increase customer loyalty?

The following infographic, as well as the points listed, help you to get an overview of the individual possibilities:

  • Well-being: Help your customers to feel good. Self-image and self-realization are very strong drivers for most people. I personally wear almost exclusively Toms shoes in summer. I like them a lot and the beautiful story about the brand even more!
  • Gamification: Curiosity is a strong motivator and one of the most important driving forces of human behavior. Take a playful approach! But please, don’t make the 12’000th wheel of fortune!!! Give me a call, I will gladly give you a dozen better ideas for free: 079 769 02 55
  • Reward: I give you and you give me. Granted, a good tool, but it also has limited usefulness. Keep in mind that rewarding is the downside of punishment. If you reward a customer for one thing but not for another, it can easily be misunderstood. Also, 10 kickbacks are a lot today and a little less tomorrow. Instead, try to reward them unexpectedly. My wife bought a coat from Burberry in Zurich. Admittedly, not cheap. We paid and enjoyed the beautiful coat. On her birthday she unexpectedly received a bouquet of flowers from Burberry, which put everyone, including my birthday bouquet, in the shade. There were at least 20 pink roses in it. WOW! The consequences are foreseeable: we now have a fixed Burberry annual budget.
  • Reliability: plays an important role in building trust and loyalty. People are creatures of habit. It is like Newton’s first axiom: A customer (body) remains in a state of rest or uniform linear motion as long as they are not forced to change their state of motion by forces acting on them. So if you influence your customer, then do it well thought out.
  • Trust: Listen to your customers. Let the customers have a say in your decisions. Let them judge you. The more a customer is involved in your business, the higher the exit barrier.
  • No competitive thinking: Do not isolate yourself from your environment. A good customer loyalty program has no claim to total exclusivity. Obliging/forcing your customers to do something is the opposite of trust! An excellent example for this is qiibee. It is much more promising to be part of an open community than to keep to oneself and only move on one’s own, controllable and manageable terrain.
  • Convenience: Make it easy for the customer to love you. We live in digital times. There myriad fantastic possibilities to positively surprise the customer.
    Whatever you do, do it with both your mind and your heart. Loyalty has to do with decency, fairness and inner solidarity. Help people realize that they are worth much more than they think, and they will move mountains for your company.

 

Source: ROI of Customer Experience Archives. (2018, October 2). Experience Matters. Retrieved from https://experiencematters.blog/category/roi-of-customer-experience/