Dynamic Pricing Is Picking Up Steam. Should You Be Considering It?

For years, eCommerce retailers, airlines, airport parking lots, hoteliers and even Uber have priced according to demand and other factors, but now brick-and-mortar retailers and other consumer-focused organizations, including ski resorts, professional sports teams and even the Indianapolis Zoo are getting into the act. according to a recent Wall Street Journal report.

According to Whatis.com, dynamic pricing is pricing that is controlled by pricing bots, which are software agents that gather data and use algorithms to adjust pricing according to business rules set by each company. Typically, the business rules take into account such things as the customer’s location, the time of day, the day of the week, the level of demand and competitors’ pricing.

With the advent of big data and data analytics, however, business rules for price adjustments can be made more granular. By collecting and analyzing data about a particular customer, a vendor can more accurately predict what price the customer is willing to pay and adjust prices accordingly. Is this idea catching on?

IBM, in fact, launched a software tool this week that uses data analytics, including competitors’ latest pricing information, to determine the best pricing for their clients’ customers. And New York startup Dibs Technology recently raised $1 million in seed money to bring a dynamic pricing solution to the fitness industry.

Business of Fashion told Forbes that having one price for everyone simply isn’t the logical thing to do from the retailer’s perspective. “The theory is that a business isn’t maximizing its profits on each individual sale by charging one price because some consumers would have been willing to pay more,” Forbes wrote. “On the flip side, some consumers who don’t want to buy at the set price point may be willing to make the purchase if the asking price was just a bit lower.”

According to a blog post from Econsultancy, businesses that have flexible pricing have been able to increase profits by an average of 25%.

Dynamic pricing isn’t just based on certain consumers’ willingness to pay more, according to Bloomberg. For example, Grocery store chain Safeway might use dynamic pricing to upsell a customer that bought a lot of eggs a great deal for 18 eggs. Using complex algorithms to sift through shopping data, Safeway could guess each customer’s needs and produce special personalized offers for each person.

A Wall Street Journal investigation found that Staples.com displays different prices to different people after estimating their locations. More than that, Staples appeared to consider the person’s distance from a rival brick-and-mortar store, either OfficeMax or Office Depot. If rival stores were within 20 miles or so, Staples.com usually showed a discounted price.

Are there any negatives to dynamic pricing? Companies that aren’t as high-volume as, say, Amazon, can get into trouble with their customers if their smaller size necessitates more drastic peaks and valleys to capitalize on rushes of traffic, according to Pyments.com. “And if customers reject what retailers are embracing as the future of brick-and-mortar pricing, it could end up being a battle where both sides have more to lose than they have to gain,” Pyments wrote.

Also, this solution category, which hasn’t crossed the tipping point yet, doesn’t appear to have been proven in the B2B category. That is likely a result of the fact that those sales take longer to close and are more personalized to each client.

However, in a world where personalized and customized relationships are one way companies are winning out over the competition, we can expect dynamic pricing to continue to evolve as one component of that competitive effort.