Dynamic Pricing has been hotly debated by experts for quite some time now. I have taken a closer look at what exactly the term dynamic pricing entails and at the potential and risks associated with this principle.
Supply and demand essentially determine prices not just in offline markets but also in online ones. Goods are priced according to existing quantities, buying behavior and other transaction-related features – the same usually applies to services as well. Modern commerce is characterized by a more optimum matching of prices to customers through improved – mostly more individualized – customer appeal. Raising awareness and a higher level of involvement with customers help to maintain and increase sales levels. And since price is a, if not in most cases, the key buying criterion, this is the variable that is adjusted to achieve the best impact on the buying decision. The only question that still needs to be answered is whether this effect turns out to be equally beneficial for both parties and what impact dynamic pricing can have on the online print industry? But in order to be able to explain the essentials, you need to be clear about the relevant data that is factored into a buying decision.
Buyer data and pivotal buying behavior are ascertained by log-ins to closed sections of websites and general tracking. Of course some trackers are also required to provide potential buyers with greater shopping convenience – personalized online advertising is however regarded as the main focus. In order to personalize prices, surf behavior relating to recently search-for items, to click and buying behavior and other customer characteristics are monitored. These are familiar aspects, you would think. But this also includes searches for personal activities and saved content, like online reviews and blog posts. Data related to the interest of the buyer in a particular seller, such as website visit frequency, can also be added. If a customer frequently visits a company’s website, it’s safe to assume a higher level of interest on the part of that customer, which means the company can charge a higher price. So much for obvious pricing criteria. But even factors like time of day, operating system, browser, geographical location (geo pricing) and weather can play a not insignificant role here. Data collection (data mining) and the analysis of “environment factors” therefore provide ample opportunities, i.e. enough input, for the seller to be able to factor in not just short-term but also longer-term informational and buying behavior.
This is where algorithms, which also factor the competitive environment and the company‘s own strategy alongside the customer information into the price adjustment process, now come into play. The “optimum price” for a particular transaction is calculated based on all these parameters and it is designed to exploit the customer’s willingness to pay as effectively as possible, as well as gives the buyer the feeling of having obtained a fair price (dynamic price updating). If parameters change, short-term or even longer-term price changes can result. What is also interesting is that changing online prices now also have an impact on offline prices, e.g. at consumer electronics retailers – i.e. in bricks-and-mortar retail outlets. Thus shorter-term price adjustments as seen at analog Points of Sale are becoming increasingly more likely in other segments.
A more or less complex version of this approach that is familiar to us all has been adopted by providers of scarce goods, like airline tickets or sought-after event tickets. If you consider Amazon’s eCommerce system, things get a little more complicated, because Amazon itself is not a seller, but provides the platform for other sellers. Here a range of prices just from one site alone are factored into Amazon’s therefore very variable pricing – there has already been plenty of coverage on the Internet about these rapid and to some extent substantial price changes.
The bevh, the German E-Commerce and Distance Selling Trade Association, recently published figures about dynamic pricing. According to these figures, around 40% of companies involved in distance selling, also referred to as interactive selling, already apply dynamic price adjustment methods. More than 80% of the companies surveyed stated that they adjust prices in line with their needs – based on corporate goals. More than half factor in competitor pricing and a quarter of them react short-term, i.e. to the informational and buying behavior of customers, by applying flexible pricing. 40% – the number of companies that apply dynamic pricing is actually not that high, don’t you think? To date not, but there is clearly an upward curve. A majority of sellers already regard dynamic pricing as a valuable tool, yet not all of them have got round to applying it in their own businesses.
But what are the benefits that the online print sector can derive from dynamic pricing? First of all you have to consider that self-configured print products are not as easy to compare as products with non-configurable or non-variable features. So if product and service are amalgamated in the price, that makes it all the more difficult to compare and therefore to adjust prices immediately. When searching, for example, for business cards in most pricing search engines, only the price of the raw material for DIY printing is therefore shown. Since online print providers usually state (tiered) prices, which are based accordingly on product category and configuration benchmarks, to customers for guidance purposes, online print providers have to factor in significantly more parameters that providers of ready-to-sell products do not. Of course informed customers (no matter whether B2B or B2C) are aware of what prices various providers charge for largely the same degree of product configuration. Now the challenge in applying dynamic pricing consists of not antagonizing existing customers as far as possible by increasing prices, while at the same time gaining new customers by means of “downward” price fluctuations.
In the online print sector the low-price argument is always applied, especially in relation to products, the market potential of which is already as good as exhausted. Dynamic price adjustment could possibly be one method of adapting offerings. It is intended to align offerings with customer needs, by providing potential as well as repeat buyers with benefits tailored to them personally, which don’t just draw on the original price. A good example would be a voucher that provides the customer with a price benefit at the location where that customer is likely to place an order in the future, based on information gathered. If, for example, a restauranteur orders premium business cards for the opening of their new restaurant, a coupon for sparkling wine bottle sleeves could be of interest to the customer. That would then be classed as dynamic coupon pricing, a lucrative version of dynamic pricing.
“The exact potential of dynamic pricing for the online print sector is difficult to gage. The following applies just as much as for other markets: if you want to encourage customers to buy or repeat-buy, you should not just concentrate on data gathering and pricing, you should also not underestimate customers’ search skills.” – Bernd Zipper
What’s also interesting is price adjustment of customized products in batches of one or more. There is a higher level of customer involvement where these products are concerned , which is why personalized product recommendations and customized price benefits create a promising combination of buying arguments that could not be generated via mass marketing. Willingness to pay is different in the case of customized products and is usually at a much higher level than for standard products. Realtime adjustment therefore ensures prices are up-to-date in relation to demand (dynamic price updating) and can generate an increase in sales.
My take: That all sounds fabulous and for implementation purposes only requires software that already exists. Well, not quite! That’s because both providers and customers are well-informed. Many people are aware that online retail prices are adjusted. So the trick is not to discriminate against customers pricewise –after all consumers make their online buying decisions to a large extent based on trust. There’s a good reason why they usually search hard for reviews and opinions about products and providers before they make buying decisions. Accordingly it would be a bad idea to treat customers purely as individuals and to disregard the way customers share information, because it’s not only providers that have information at their disposal. People that see themselves in a better price situation as a result of price adjustment believe they are satisfied and will probably buy (again). However if that trust-based relationship is disrupted, dissatisfaction creeps in and switching to another provider is often easy in this fast-moving business.