A CEO Checklist for Adopting Real-Time Pricing
For generations, we have lived in a world of static pricing, which, by its nature, has translated into losses of customers when prices are set too high and losses of profits when prices are set too low. In response, adjusting prices in real time to reflect continuous changes in consumer demand and underlying supply costs has become increasingly common.
July 7 2014 by Alok Gupta and John Parker
Not only can dynamic pricing increase current-year profits by up to 25%, it offers the level of precision needed to minimize customer and profit losses and drive improved returns.
Applying these three elements can make dynamic pricing viable and tangible:
- Maximize Analytics Capabilities. Companies gather terabytes of data but use very little of it in their day-to-day decisioning. Challenge your sales and marketing team leaders to leverage all existing data to uncover new product and business model opportunities. Consider Generac, for example. The manufacturer of standby, gas-powered generators was able to expand beyond its consumer base of mostly “reactive” consumers—generally people who have suffered a major blackout—by identifying Super Consumers of proactive protection, who were willing to learn about and make a large purchase of a generator without having experienced a prior extreme event. By combining industry-leading customer prioritization tools and power outage data, Generac was able to create an entirely new set of prospects.
- Create a Clear Customer Benefit Proposition. Effectively promoting acceptance of dynamic pricing requires consumers to give real-time information in exchange for a tangible value proposition—such as price discounts on airline tickets or the ability to penny-price products via online bidding processes. We are beginning to see similar effects in property and casualty insurance, as drivers accept in-vehicle monitoring systems—such as Progressive’s “Snapshot” and other devices—for the promise of price discounts. As of 2013, 35% of Progressive’s customers were enrolled in Snapshot, and that number is growing.
- Incorporate Technology. As the Progressive example above shows, technology is rapidly enabling a number of industries to latch onto dynamic pricing. Also consider the nearly-overnight impact that bar coding had in the grocery sector’s productivity and pricing improvements. Today, all that stands in the way of grocers and fully dynamic pricing are digital displays, which are close at hand. Technology is not an end, but a means to achieving more precise and dynamic pricing. We can logically expect the technology used in these examples to expand their applications across many other sectors.
Airlines, insurance companies and online retailers are some of the industries already making the transition to dynamic pricing, while others are just beginning to understand its value. To capture the benefits of dynamic pricing, CEOs need deep consumer understanding and the initiative to adopt demand-driven strategies ahead of their competitors. It can mean the difference between simply tinkering with incremental improvements and creating new product offerings and business models that are both disruptive and lucrative.