Technology has finally caught up to supply and demand and we’re starting to see real time systems of dynamic pricing being launched beyond the hospitality and travel industries. Sports organizations are adopting dynamic pricing as an efficient means to optimize profits depending upon whether specific games are in demand or not, and we’ll soon see the systems in industries, like arts and events management, that sell perishable goods and services.
The implications for dynamic pricing will profoundly change how consumers purchase goods and services:
Dynamic pricing will encourage last minute buying
- As options markets and day old bakery sales demonstrate, prices for perishable goods or services decrease over time as date of expiration is reached. Today’s systems, like airlines, try to sell tickets at the highest possible price to last minute buyers.
- However, lowering prices as the perishable good reaches date of expiration may aggravate earlier buyers who purchased at the higher price, and may require rebating to the lower price in order to appease the earlier buyer.
- The risk / reward quandary that dynamic pricing introduces is whether lowering prices to fill all seats is worth alienating advance purchasers. One solution is to create alternate sales channels, like Priceline, where earlier buyers can’t complain or don’t know about cheaper offers.
However, all retailers and service providers want consumers to purchase way in advance so they can revenue forecast. A bird in hand is worth two in the bush, but dynamic pricing encourages late buying.
- Dynamic pricing requires that providers constantly adjust pricing in order to meet timely revenue goals. Elaborate pricing algorithms will be created to optimize this process.
- Providers must become more sophisticated in profiling their customer base so they can court their price-insensitive loyal customers over the bargain hunters.
- Viral marketing is a key component to dynamic pricing. Groupon and other group buying systems, a variation of dynamic pricing, can be used strategically to “instantly” supplement sales in order to meet revenue goals.
Dynamic pricing will spur multichannel distribution systems that segregate pricing tiers
- Hotels and airlines already have multichannel systems that justify lower consumer rates based on where the consumer bought the room or ticket. Priceline is a perfect example.
- Group buying is a new channel that is defining new pricing tiers.
- There’s always Costco.
Dynamic pricing can erode brand equity
- The advent of Priceline and Groupon has eroded the sanctity of retail pricing by inculcating a public perception of “Don’t buy retail”. Merchants won’t have the luxury of repeating the refrain “I won’t compete on price” when their competitors are.
- Luxury goods retailers, wineries and other brand goods caught in this consumer recession stockpile inventory that are long in the tooth. Wineries have been selling excess inventory through Costco. Groupon is an alternate channel solution that can “hide” brand erosion.