Two weeks ago I wrote a post Dynamic Pricing Made Simple, in which I explained the concepts underlying dynamic pricing. Stated simply, the demand for a product or service can vary depending on the situation, and the amount customers will pay in those situations also varies. Significant profit improvement is available for the companies that can identify those different situations, quantify the potential change in customer value, and set prices accordingly. Conversely, companies that are not prepared to manage a more complex pricing structure can cause long-term damage by implementing it poorly. I recommend taking a logical incremental approach to pricing improvement (do it in steps over time).
You may be thinking “Wait, you just told us it is simple. Now you are saying it’s complex and we could be worse off. Which is it?” Well, conceptually dynamic pricing is quite simple, as you saw from my previous post. The complexity arises when you attempt to turn those concepts into specific (different) prices for specific customers and situations. If your employees, processes, and systems are currently organized around most customers and situations receiving the same prices, the transition to more differentiated pricing may be bumpy. And, if customers perceive you are trying to rip them off or cannot perform basic tasks, they will leave, and profits will decline.
Let’s consider a few examples. First, do you publish prices on your website and sell directly from the site? Will those published prices change according to the situation, or will they be adjusted using a code during checkout? If the published prices are to be changed based on the situation, will those changes be automated with artificial intelligence, or will someone have to execute some programs? Worse yet, does someone need to manually change the prices?
If you plan to use some types of codes at checkout, how will you communicate the codes to customers, and how will you ensure the codes are only accepted for the appropriate times/situations? All these questions must be addressed by your systems and processes. Do it poorly, and customers can defect.
Next, let’s consider sales reps. In many organizations, a central group sets a list price for each product or service and allows sales reps some limited authority to discount. In my experience, I’ve found that each rep tends to offer similar discounts to each of his or her customers (and often near the limits of their authority). That is, the prices a specific sales rep sells are in a somewhat narrow band. With price optimization or dynamic pricing in place, some customers may start to pay much higher prices for some things and others much lower. How do you train your reps to understand your new pricing strategy and avoid those reps concluding that you are gouging some of their customers? Imagine the damage that can occur if a salesperson does not understand your new price structure and tells a customer, “We charge more to customers who aren’t price sensitive.” It is critical to ensure that your organization has a shared understanding and consistent message about who gets which prices and why.
A related consideration involves other back-end processes and systems. If sales reps have the authority to discount within some ranges, how do you ensure they manage within those limits? Let’s assume a product currently has a list price of $100, and sales reps can discount by 15% or less. Do all your new optimized prices fit within that range of $85 to $100? If so, will the reps’ authority remain at prices of $85 or higher? What if your dynamically set prices now range from $80 to $120? Will reps be able to discount each of those by 15%? Will your processes and workflow tools need to accommodate the new price structure?
One last area to consider is the pace of change. The world moves quickly, and organizations do not want to be laggards. There is significant pressure to adapt quickly. When process changes can’t be automated quickly, it can be tempting to implement manual workarounds. These can be effective if they are not too complex; however, if the new steps are very cumbersome, your employees will resist. When that happens, your attempts at change are at risk of failure.
I have written multiple posts, arguing that simplified pricing often results in lower profitability than more complex pricing structures, and I believe it.That said, your organization must be capable of managing that complexity. Before launching initiatives to optimize your pricing or implement dynamic pricing approaches, make sure you ask detailed questions about how you can implement them. If you are not ready to manage all the components, take logical incremental steps toward your goals. Doing so, you lessen your risk of failure.You can make a lot of money from gradual improvements without needing to be perfect.
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