Dynamic Pricing Online, Getting it Right


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In 2011, the Cardinals introduced dynamic pricing to help more accurately price tickets for individual games and provide fans with more price options.

This means that the team has the ability to adjust ticket prices upward or downward on a daily basis based on changing factors such as team performance, pitching matchups, and the weather.

Tickets to Broadway musicals are being sold this way. The National Hockey League is doing it.
 
Whether you travel for business or pleasure, you know that airlines have been serving up different prices for years. Their model of yield management and dynamic pricing is incredibly complex and opaque.
 
New York City cabs implement surge pricing by turning on their off-duty lights. They still stop when you hail them; doors locked and ready to negotiate with you.

Uber dynamic for Uber reliable

An alternative comfortable way of moving from point a to point B is by using Uber, an on-demand car service that allows everyone to have a private driver experience through iPhone, SMS, and web based requests.

Despite the company communications about fare hikes ranging between three to over six times normal rates, Uber customers nationwide felt taken for a ride after requesting an Uber on one of the busiest nights of the year: New Year's Eve.

In exchange for providing cars on demand reliably, Uber used its system to find equilibrium within a market where demand outstripped supply, especially a few hours before and midnight.

Uber uses something airlines, NYC cabs and sports teams/entertainment companies have been using for some time. The difference in how they execute is transparency. Here was a proposed redesign of Uber surge screen. And here's how Uber CEO responded to complains.

Dynamic pricing is based upon input data. The more data a provider has on these inputs, the more likely they are to leverage that data to extract more value from providing equilibrium between supply and demand.

One side of the dynamic pricing coin consumers have become familiar with is daily deals. The other side to discounts and coupons is premiums for things that are scarce.

Getting the pricing right is critical to your business

Pricing is information. Getting it right can affect the growth of your business. As an example, here are some experiments in pricing models by 37Signals. As Jason Fried says:

I thought about the problem and decided to try something new. Instead of doing long, expensive projects, we'd do short, affordable ones. Instead of billing $50,000 for a 15-page website redesign that would take three months, we'd charge $3,500 per page and offer to complete the page in a week. If you want another page, it's another $3,500 and another week. We called it 37express.

It took off. It took the risk out.

Tied to your brand, pricing is one of the key elements you can use to affect behavior.

By anchoring, for example. This is something non profits have learned to do well. If you've seen solicitations for donations by police associations, for example, you will see they pre-print amount levels. Something like $25, $50, $100. The suggestions take care of what in organizations we often refer to as "blank paper syndrome".

You have some ideas that can get you started on your choices. In the book The Undercover Economist, Tim Harford highlights price anchoring by explaining coffee pricing and customer purchasing choices, as I outlined in a post about who gets what and why. I included an example of how supermarkets rearrange the information they provide you to sell more of certain items.

Pricing sends a message to the market and creates expectations about value, says Patrick Lefler in a new ChangeThis manifesto that outlines five rules to help guide your process. These are:

  1. anchoring — by using different price points
  2. the power of free — with an example out of Dan Ariely's research
  3. using pricing to innovate –as in the dynamic pricing examples in this post
  4. letting pricing drive value — perception rules here, as does being appropriate 
  5. price wars are a fool's game — make sure you're trading your model, and keep your eye on why people buy your product

With online products, you can do some testing letting people self select to figure out price points. 

Pricing is a strategy. Which one would work best for you? More money for fewer sales, or sales volume?
This is the topic of two in depth case studies published at Jason Cohen's site. 

Become intimately familiar with your numbers — what you need to bring in to earn reasonably good margins on your work.

We do understand value by context, as in the example of Uber being more reliable than a taxi service and the service pricing scale based upon that and demand on one of the busiest nights of the year in NYC.

Which is why you should think in terms of creating the conditions to earn the right price point. Because it's not just about squeezing out the last dollar from a customer in the name of profit. It's also about building the basis for repeat business by delivering on your promises.

 

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