If you’re reading this article you’ve probably heard the hype surrounding Dynamic Pricing. Depending on how long you’ve had your eye on the space, or how in-depth you’ve looked, you’ve probably come across examples such as airline tickets or Uber’s success (and negative PR around surge pricing). If you’re reading this from the States, you may well have experienced Dynamic Pricing first hand when you bought tickets to the NFL from one of the 16 teams now using the pricing strategy.
But if you happen to be one of those rare businesses that isn’t either
- An international airline
- A unicorn start up that revolutionised transport
- A multibillion dollar sports entity
Then you’d be forgiven for looking for dynamic pricing examples that are actually relevant to you.
So what are some examples of Dynamic Pricing that you can sink your teeth into?
How about the Australian homewares retailer that used dynamic pricing to increase its overall revenue?
The business runs 40+ brick and mortar stores across the country, as well as an online store for a combined revenue of just under half a billion Australian dollars. The company saw the impending arrival of a certain American company that had revolutionised e-commerce (who also changed the way businesses approached price) and decided they needed to act or face extinction.
Knowing they had valuable data they could now put to use, but unsure what specifically to do with it, the company reached out to us at Remi AI. We ingested their sales, price and Google Analytics data to deliver a dynamic pricing strategy to capture the greatest revenue possible, while adhering to a number of business constraints.
Australian consumer laws don’t allow for different prices in-store and online, so our client is limited to changing their prices once per day (to avoid needless wages spent on changing prices throughout each store Australia-wide).
What that means in a tangible sense is the platform generates results in the form of pricing recommendations for the firm’s weekly pricing meeting which are then double-checked and accepted or rejected during the pilot part of the project.
If you’re thinking “the author implied these would be real world examples then listed a multi-million dollar company, which isn’t me at all”, then the next example might be better suited to you.
What does Dynamic pricing mean for a small-to-medium Ecommerce player?
It can mean huge increases in revenue and conversions.
Dynamic pricing is more about subtle tweaks then huge swings in price. When applied intelligently, a pricing strategy for ecommerce tends to increase prices when there is greater traffic through the site, and reduce it when there are fewer visitors to your site. The logic behind this is that not all consumers have the same budget and with greater traffic we make an assumption that a greater number will be willing to pay for the good or service on offer, thus you sell fewer units with a greater margin. We are tapping into an old economic measure known as Price Elasticity of Demand, which you can read about here.
One of our clients, a London-based furniture maker line that ships all over the world, built out their offerings into three distinct pricing tiers that all had different pricing limits for each. This gave the Remi Price Optimisation platform different levels to position each offering at, whilst ensuring price changes from one tier wouldn’t cannibalise sales from one of the other tiers. With the platform autonomously changing price depending on the demand, the fashion line has seen increased revenue.
For a brick and mortar business, the hardware required for pricing success that isn’t nullified by manual change over of tokens comes in the form of digital price tags that can be changed remotely - ie without a staff member going from item to item, changing price tags or stickers, printing off new ones etc. This approach is common in Europe, particularly in supermarkets. Some of the players in the sector are experimenting with dynamic pricing in the food hall.
Running trials on baked goods these retailers have seen a lift in revenue and profit. Interestingly, they’ve also experienced a drop in wasted food (dead stock) of 30%. This is obviously a hugely exciting development, but with the caveat that inefficient to execute without the requisite hardware.
A truly fascinating example combines the online with the real world. Hoyts, an Australian cinema company, used Dynamic Pricing to not only drive up revenue, but also to shape desirable customer behaviour.
First to the Dynamic Pricing:
Using the electronic display at front of shop, Hoyts was able to dynamically change price. Their strategy was subtle changes throughout the day, but overall a higher price than an online purchase. This was to capture the maximum revenue from those who saw a film on a whim. Hoyts also experimented with dynamic pricing for their food and drinks, but more on that later. Soon, most customers recognised the significant price difference and made their purchases online. This, in fact, was the end goal for Hoyts in the first place, as it was of greater value for them to have forecasting capability. Knowing further in advance the number of tickets allowed them to streamline business offerings - all the whilst still using dynamic pricing on their online sales too, to ensure maximum revenue.
But what did they learn about the demand for food and drink? Demand was inelastic in relation to price - which is to say that people who were going to buy popcorn were inclined to pay whatever price was on offer.
So Hoyts dropped Dynamic Pricing on food and drinks and returned to a static pricing model, a highly profitable model (sources online say cinema popcorn has an 8000% markup!).
In conclusion, Dynamic Pricing represents a powerful tool for businesses. Whilst it has impact in the real world, its most actionable application is the world of eCommerce. It is more nuanced than simply tracing cookies and raising prices the closer it gets to the deadline of a sale (ie, flights or hotel rooms). Executed well, Dynamic pricing is subtle price changes that don’t warrant a second glance for your customers, but leads to maximum revenue for your business.
The way forward for pricing technology in ecommerce businesses is clear; adopt a pricing technology that allows you to bring a dynamic layer into your business, without sacrificing your overall pricing strategy.
For information on the Remi AI Price Optimization platform, please feel free to visit this page for further information.