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.
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.
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.
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.
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.
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!
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/.