A Balancing Act
By Laura Iles - Senior Consultant, Integrated Insight
In the
process of evaluating pricing strategies, we all begin the same way: searching
for the Holy Grail of strategies in our space, the one to maximize profits. Beyond
the basic math, then, what is it that differentiates the leaders in an
industry?
To
answer that, we must consider the broader impact of consumer perception and
behavior within the context of pricing decisions. Occasionally, strategies
which seem less attractive become more valuable when the psychological impacts
of pricing are considered, and vice versa.
Pricing
strategies require a delicate balance of the company’s requirements and the
consumer’s needs. Too often, companies employ a strategy that blatantly ignores
one of those factors.
Dynamic Pricing
Dynamic
pricing in particular conjures images of the airline industry. Customers feel
obligated to monitor multiple ticketing options over a series of days in their
effort to find one that fits their needs at the right price.
Of
course, we all know of someone who has gone through this effort, only to arrive
at the gate to discover that their seat is gone, the flight oversold in an
effort to maximize profits.
To the
consumer, this process is stressful, frustrating and dis-empowering – not the
concepts you want associated with your firm.
Price Matching
Price
matching strategies reverse this imbalance of priorities. As big box stores
price match online retailers in an effort to cater to their customers, it leads
to a decline in profits that ultimately hurts the company and the consumers.
Consumer –Targeted Pricing
Other
stores, such as retailers Staples and Home Depot, have eschewed the low online
price strategy and instead taken a multi-pronged approach. They combine dynamic
pricing, shifting in response to competitor’s pricing, with variable customer
pricing based on demographic factors. [1]
In one
such example, customers on the Staples and Home Depot websites are targeted by
location (using their IP address). Proximity to a competitor’s store lowers the
price point they are shown, while proximity to a local Staples or Home Depot store
raises the price point. Sometimes the difference is negligible, other times it
is significant. In neither case is the consumer aware the pricing has been
tailored specifically to them.
Consumer Reactions
The
targeted approach is perfectly logical from a business perspective. The more
competition, the more it begins to make sense to compete on price. In
low-competition areas, higher online prices ensure you do not undermine your
brick and mortar business.
Unfortunately,
as in the airline and sports industries, consumers do not appreciate the idea
of paying more than their neighbor for the same product. The secrecy
surrounding the mere existence of the practice further aggravates their sense
of distrust.
To
date, these stores’ refusal to divulge precisely how the pricing is determined
leaves shoppers with the uneasy feeling that that they are being penalized for the
city in which they live.
Ultimately,
the lack of transparency is damaging brand images and leaving shoppers wary of being
monitored and targeted.
Learning
to Love Dynamic Pricing
Compared
to wholesale price matching or a flagrant disregard for the consumer’s
experience, the targeted strategy in and of itself is a valuable one. There is
nothing to be gained, for either consumers or retailers, by continuing to
engage in price wars, slashing prices to match other retailers and cheap online
sources. Dynamic pricing, in its various incarnations, works.
The
challenge facing many companies today is to increase consumer acceptance of new
strategies by introducing them in such a fashion as to highlight the benefits
to the end user. High barriers to entry have, to a certain extent, protected
the airline industry from repercussions relating to the frustrations around
pricing strategies. For other industries, success will not come so easily.
The
sports industry in particular has handled the transition into dynamic pricing
well, and can serve as something of a model for other industries. Teams were
slow to adopt dynamic pricing for fear of alienating fans, a stance which
helped to reassure loyal customers.[2]
Since
adopting dynamic pricing, several of the teams, along with one of the main
software providers, Qcue, have been remarkably forthcoming in discussing how
and why new pricing strategies were implemented.[3]
As a result, the variable pricing has slowly gained approval among fans, while
team images remain untarnished.[4]
Transparency
goes a long way towards dispelling customer discomfort with new pricing
strategies. The most efficient and profitable system in the world won’t do you
a bit of good if you damage your brand because your customers think you are
taking advantage of them.
[1] http://online.wsj.com/article/SB10001424127887323777204578189391813881534.html
[2] http://www.bizjournals.com/seattle/print-edition/2012/03/09/mariners-try-out-demand-based-ticket.html?page=all
[3] http://espn.go.com/blog/playbook/dollars/post/_/id/597/dynamic-pricing-is-new-trend-in-ticket-sales
[4] http://www.forbes.com/sites/prishe/2012/01/06/dynamic-pricing-the-future-of-ticket-pricing-in-sports/
