Checking Assumptions

When is the last time you really revisited the assumptions baked into your pricing strategy?

I recently spoke with a Georgetown student who is writing a book on dynamic pricing. Dynamic pricing refers to the practice of updating prices based on current market demand and supply. While yield management, a form of dynamic pricing, has been practiced in industries such as airlines and hotels for years, technology is enabling a wider range than before of companies to adjust their prices according to market dynamics.

I look forward to reading what he writes and where he seems dynamic pricing going in the future. I have my own ideas, too. Some industries think they are immune to such developments, and in fact it feels odd to imagine certain kinds of companies practicing dynamic pricing. Seeing bananas sold with an electric price tag changing amount every few minutes would be unusual.

Norms are Powerful

Pricing is not only numbers, but strongly psychological and emotional. Certain norms emerge that dictate how products and services are sold in different industries. Customers come to expect those norms, whether or not they are necessarily the most economically efficient.

For instance, customers are (mostly) fine with the logic that if you fly with more luggage, you should pay more, because it’s expensive for an airline to carry all that weight. But an airline that tried to price a ticket based on the weight of the passenger would cause an uproar.

But Norms Do Change

With that said, nothing in a market economy is ever static. Companies find ways to experiment with new structures that deliver value in ways that customers didn’t even know they needed.

Many have pointed out that in the days of the early Internet (back when the word itself was capitalized), everyone said it was dangerous to use your credit card online, meet strangers in person, or get into a stranger’s car. Now we don’t think twice about using the internet to pay a stranger for a ride. Norms change.

Customer expectations change, too. Let’s continue thinking about ride sharing. With taxis, customers were accustomed not to know what their final fare would be. At best, if local, they would have an approximate idea of the price based off of distance and time required.

Lyft and Uber originally copied this, where you would only see your final price once the ride was completed. They showed how your rate would be calculated, but not the rate itself. Pricing transparency, not price transparency. Perhaps this similarity helped customers feel comfortable transitioning to online platforms.

Eventually, and pretty quietly, these companies switched to showing you the final rate at your time of purchase. That rate still includes dynamic elements, but now it’s presented so that there are no surprises at the end of your trip. Was this a customer demand? Not explicitly that I could tell. Norms, aided by technology, and nudged by innovative companies, changed.

When It Comes, Change May Be Very Fast

In many industries, it is assumed that the current pricing structure is what it always will be. What has worked in the past will surely work in the future. There are larger strategic issues at hand than pricing, thinks the CEO.

Then Dollar Shave Club arrives and in five years becomes a billion dollar company simply by changing what had always been a point sale into a subscription. Nearly all it took was checking the incumbents’ pricing assumptions and showing customers they could expect better.

Are You Being Proactive?

Dollar Shave Club is only one example of a new market entrant becoming wildly successful by seeing the opportunity to change the pricing structure of an entire industry. They knew that pricing is a verb, not a noun.

I was recently in Barcelona for another excellent conference put on by the Professional Pricing Society, and dynamic pricing was a topic on many people’s minds. An executive at a large Spanish brick-and-mortar retailer addressed a question about dynamic pricing in his industry by saying that while he didn’t think the time was right quite yet, he saw no reason that it wouldn’t arrive in the future.

He put it this way: technology is “onboarding without option” customers to the idea that prices will be dynamic.

Onboarding without option. I like that phrase. Changes to industries aren’t optional. If you’re not prepared for the wave, it will crash over you and leave you behind.

What are you doing to make sure that you’ll be ready? Better yet, could you be the company that leads the change?