Is dynamic pricing right for your business?
Looking at the examples from giants like Amazon or Uber (which I will cover later on in this article), it may be tempting to follow their lead and implement dynamic pricing. It’s a great solution for many e-commerce retailers, hotels or airlines but many companies stay away from this solution because of the risk of disadvantages outweighing the benefits. Let’s have a closer look at some of the disadvantages and analyze whether there’s an actual risk.
What if your customer thinks they got a bad deal? Dynamic pricing will often help customers pay less but at times, they might get frustrated that they paid more than someone else for the exact same product or service. And aren’t flight ticket prices a taboo while you’re on a plane? Nobody wants to learn that they’ve overpaid. So customers can get frustrated and this may lead to complaints, bad reviews, and even returns. If you’re making your customers ask for their money back, you’re doing it wrong.
Ultimately, you want new technologies to fit into your overall business strategy and help you achieve your goals – one of them being customer retention. Losing customers is an expensive issue, so you need to steer clear of anything that can make retention drop. How?
I’ve discussed the “dos and don’ts” of dynamic pricing in the previous article in this series: What’s the use of dynamic pricing. Long story short: make sure you’re transparent about your pricing strategy. When your customers understand why prices change, they’re more likely to accept it.
Lower customer loyalty
This is a natural result of customer alienation. When customers feel that you’re tricking them into paying more, they will explore other options. They shop around and know how to get the best deals, and they can always use price comparison tools. You can use this in your favor by adjusting your prices to remain competitive, but this can also work against you when customers feel that the prices they are charged are unfair.
Even more competition
It’s a competitive world out there, you know it too well. And, perhaps not surprisingly, this is still connected to how your customers see your pricing strategy. As a company, you should offer some unique value: you may be the store that has it all, you may deliver in 24 hours, you may have the most affordable products, or you sell one-of-a-kind items. However, when your prices are “unfair”, your customers lose sight of this unique value and go shop around. Why would they stick to a company that makes them overpay? In some cases, your use of dynamic pricing might drive customers towards competing companies.
The tech has to be good
The thing is that AI-driven technologies have to be implemented strategically and well-built. That’s just how it is. You don’t need a data scientist who’s not interested in how the solution will affect your business, you need a provider (be it in-house or outsourced) who understands your business, matches the right technology to your requirements, and helps you make sense of your newly-made AI solution. You need your dynamic pricing model to be tailor-made, so it answers your needs: the prices can’t be lower than you can afford, and can’t be higher than the customers are willing to pay. The optimal price can be calculated considering various factors, and not every factor will be important to your business. You might base your prices on limited supply, higher demand, timing, competition prices. Whatever works for you. As always: keep your business strategy in mind when adding tech to it. It’s there to work for you. Period.
Is it too risky?
No. Don’t be surprised: the risks are there but when you create a strategy for adopting the model, make sure that your data science team understands your needs and requirements, and that you understand the limitations there are, you can make it work. For many companies, dynamic pricing is a must to remain competitive as they wouldn’t be able to analyze and adjust prices manually. There are far too many data points, and while people don’t deal well with too many numbers (or data points), AI rocks in this area. Dynamic pricing, used right, helps companies maximize profit, stay competitive, and works well with your sales and discounts strategy. Customers are used to the fact that various companies price the same products differently, so they may be willing to pay a couple of dollars more for that book on quantum physics since you’ve got that great deal on accessories.