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Don’t just Price Dynamically, Price Smart

Amazon, Airlines, Gas stations and Hospitality. What is the common aspect of all these industries? They are using Dynamic Pricing. But what do we even mean when we say Dynamic Pricing? Let’s shed some light into this mystery and find the crucial difference of Dynamic Pricing and Smart Pricing.

Dynamic pricing has a tendency to lead to crude and arbitrary price variations that can leave consumers feeling hard done by. With modern data analytics and Machine Learning, we should be looking to pricing approaches that are more strategic, intelligence-led and truly agile. It’s time to think smart about how we price.

Imagine a situation where there is a concert you really want to go to. You know demand is going to be sky high and the tickets won’t come cheap. But, just before they go on sale, the promoter announces a small run of half price early bird discount tickets will be made available. Great! You can see your favourite star without worrying too much about the hole it will leave in your wallet.

 

concert pricing

 

On the morning the tickets are released, you log on to the ticketing site, choose the early bird option, enter your payment details – and then get the spinning loading icon that tells you the transaction is waiting to be processed. Nothing happens. The page is completely frozen as the site tries to deal with the intense rush of sudden traffic.

Five, ten minutes, 15 minutes pass by. After half an hour, something happens – but rather than confirming your purchase, you get a message telling you that the early bird discounted tickets have sold out, and you will have to pay full price. How unfair! You were online ready to buy right as they went on sale, and now you’re going to have to pay double!

 

Pricing Frustration

 

This is an example of bad dynamic pricing in action. It is a common ploy in the entertainment industry, where vendors use discounts on fixed numbers of tickets to drive sales volumes. However, it is very different to how dynamic pricing is understood and applied in retail, or in energy pricing, or in other sectors like travel, hospitality or even public transport. The truth is, there is no single accepted definition of what dynamic pricing is, or how it works.

All that dynamic pricing really tells us is that vendors have the power to change pricing to achieve certain effects – which is pretty obvious. All too often, these changes are applied in quite crude, arbitrary ways, without enough thought about the overall impact, or whether they really serve strategic business goals. Yes, discounting a few tickets for an event when they go on sale might drive up early sales volumes. But how did the vendor decide on the number of tickets to sell cheaper? Was any thought given to the feelings of people who missed out and had to pay more? Is there another, less controversial way to create an early buzz around the launch?

Pricing Smarter

To avoid these potential negative consequences, businesses need to think more carefully about the how, why and when of altering prices – and also about how much of it customers can see.

However, let’s be fair to businesses for a moment – the intentions behind dynamic pricing might be sound. What often goes wrong is the implementation, because that’s when you run into all sorts of technical challenges.

Dynamic pricing essentially comes down to varying your pricing for a product to achieve a particular business goal – increase revenues, increase demand, increase online traffic, shift demand to off-peak time periods and so on. But the tricky part is how you make those price changes. Most ERP systems, ecommerce platforms, ticketing systems and so on support ‘dynamic pricing’ in as much as they allow for price changes to be automated by applying certain rules or conditions. But by and large, these features are fairly basic and limited to discount or quota structures only.

So with the early bird ticketing example, the promoter might want to apply a pricing strategy that is a little more sophisticated than “sell the first 500 tickets at half price” or “discount all sales in the first hour by 25%”. They might want to do something that makes every customer feel like they are getting a good deal, perhaps by reducing the discount incrementally as more and more tickets are sold to protect profits, but still giving a little something. But their pricing system only allows them to set straightforward volume or time-based rules and there is no support to determine how these rules should be set.

However, things are changing. In the data-dominated digital age, analytics and machine learning technology has progressed to a point of sophistication where it can decipher intricate patterns from vast unstructured data sets, predict future outcomes and recommend actions for optimal outcomes, all in real time. Applied to pricing, this finally gives vendors a direct continuum from their strategic pricing objectives to an optimised and automated way of actioning them.

In practice, dynamic pricing all too often just means altering prices according to a few basic rules. Smart pricing means embracing a fully agile approach which uses data-led intelligence to find the optimal balance between intended business outcomes and the real-world effects of price changes.

th!nkpricing is a brand of Smart Pricer. We are making professional pricing accessible to everyone by offering a platform to understand, simulate, and optimize your pricing with machine learning-driven algorithms and advanced demand prediction.

Want to stay in the loop and become a #pricinghero? Subscribe to our thinkpricing newsletter to not miss any upcoming blog posts.

3 Ways to Determine What Impact a Price Change Will Have on Your Demand

“How will my customers react if I change the price of my product or service?”

Sounds familiar? It’s a fundamental question every business owner asks (or should ask) themselves.

As a core principle, businesses can expect demand for their products and services to decrease when they raise their prices. But how much a price increase will impact on demand depends on a wide range of other factors, including the type of product being sold, customer attitudes, current market conditions, levels of competition and so on.

Getting a clear sight of these ‘unknowns’ is crucial to determining the impact a price change will have on your demand. In this article, we will explain three practical methods for accurately assessing the effect of increasing or decreasing price:

1. By asking market experts,
2. By surveying your customers,
3. By carrying out price experiments.

Before we dive in, first have a quick recap of the theory of how and why price affects demand.

The Price-Demand Curve shows the relationship between price and demand

In two previous blogs, my colleague Fabian gave a brief overview of the law of supply and demand. We then went on to explain the price-demand curve and the role it plays in making pricing decisions. In brief, the law of supply and demand tells us that, as the price of a product increases, demand for it will fall.

The higher the price – the fewer people buy.

If you plot price against actual or forecast sales quantities, you will usually see a curved line as in Fig. 1. Let’s take the example of our previous blog posts of milk sales to illustrate the price-demand curve.

demand curve for milk

Figure 1: The demand curve for milk

 

What’s clear from this diagram is that the higher the price for a litre of milk, the lower the quantity sold. This means higher prices drive down demand.

But what’s useful about our milk graph is the fact that it allows you to calculate a revenue figure for every price, simply by multiplying by the quantity sold.

So on the milk curve above, if you started at €1 per litre, you can see you would sell 100 million litres, so your revenue would be €100m. At €2 per litre, demand falls and you only sell 60 million litres, but 60m x €2 gives you revenue of €120m.

Using that price-demand curve, you can see that a price increase to €2 would harm demand, but still a positive impact on your overall earnings. Thus, the price demand curve is super helpful in determining the revenue optimal price. However, the problem is that most businesses do not know their price demand curve.

That’s where our three practical methods come in. We also let you know which one to use based on your needs and resources at hand.

1. Ask the Experts in Your Market

This is what we call the ‘quick fix’ – as it is arguably the most straightforward option. If you want to predict how a price change will affect demand and ultimately your profits, asking internal or external experts in your market for their views is likely to give you some workable figures faster than any of the other methods.

 

expert interview

The Approach

In this approach you ask internal or external experts to give subjective estimates what impact they feel an increase or decrease of 5%, 10%, 15%, and so on would have on demand.

Application proposal

This method is best applied, when asking your customers is too expensive or would take way too long. This is often the case for launching new products and services and you don’t have any existing sales data to use. Asking expert opinions is also useful to use alongside other methods to help verify your findings.

Recommendations

Ideally, you would survey 5 to 10 different experts, ideally from people with different roles and positions in the industry, and take an average of all responses to get as rounded and reliable a picture as possible.

As well as being quick and relatively inexpensive, surveying experts is especially helpful if you need some informed opinion on your market.
If you have surveyed experts, you may find it difficult to plot precise quantity values for different price points, especially if you have asked several different questions. It’s sometimes easier to collate data to show how percentage price changes – plus or minus 5% or 10%, say – would lead to percentage changes in demand. This can then be plotted onto a different type of price-demand curve, as shown in Fig. 2.

x (price) -10% -5% 0% +5% +10%
y (demand) +10% +3% 0% -3% -15%
price demand graph

Fig. 2: Price-demand graph showing the impact of the percentage change in pricing

 

From this graph, you would conclude that price changes around +/-5% only result in minor changes in demand, which is unlikely to have a significant impact on your revenues or margins. Price changes within this range would, therefore, be acceptable. But as you can see, price increases above 5% result in a sharper drop in expected demand, and probably wouldn’t be wise for your business outcomes. A conclusion from a graph likes this would be to slightly increase prices.

2. Survey Your Existing Customers

The question of how price changes impact on demand ultimately falls under the realm of marketing, and like all marketing questions, the most obvious route to an answer is to ask your customers. Surveying customers about how price changes would affect their likelihood to buy a product might be seen as the ‘standard’ approach and is viewed as providing robust and trustworthy answers because the data is ‘straight from the horse’s mouth’ – the people who buy your products.

 

customer survey

The Approach

In this approach, your customers are asked what impact price changes will have on the demand for your product.

Examples of variations on questions might be as follows:

● Would you be more/less likely to buy product A if its price was increased/decreased by 5%? What about 10%?
● How much would you be willing to pay for a product that can do x? What about if it could do y and/or z?
● What is the absolute maximum you would be willing to pay for product A? What about for features x, y and z?
● What do you think is a fair price for product A?

Application proposal

Quizzing customers about the impact of price changes is a fairly easy and standard way to estimate price demand curves. However, the downside is that the price becomes the focal point of the survey and your customers aren’t providing answers from a position of detailed knowledge about the subject, only voicing an opinion about how price affects their feelings about buying. There is, therefore, a greater risk of answers being skewed by the way questions are worded, not giving an entirely true picture of what people think.

For that reason, customer surveys tend to be quantitative rather than qualitative, or a mix of both. That means surveying a large enough sample size to make averages statistically robust, which in turn usually means asking hundreds of participants.

Customer surveys take time and can be costly.

Recommendations

It’s good practice to ask the same or similar questions in different ways, either on the same survey given to all participants or asking variations of the same questions to different sample groups. This minimises the risk of any bias caused by how questions are worded and make the data collected as detailed and nuanced as possible.

You typically start your survey with a small subset of customers to test different questions and then roll it out to 300 or more customers to have a sufficient sample.

3. Conduct Price Experiments

price experiment

 

One of the biggest trends to impact on marketing over the past decade has been a move away from focus group and survey-oriented customer intelligence gathering to what might be called ‘live’ experiments. These mean the following: giving customers a controlled set of options and seeing what choices they make.

The Approach

If you wanted to assess the impact of a price change you would carry out what is known as a split or A/B test. A certain group of customers would see price A (say a 5% rise) and another group would see price B (say a 5%) decrease, with a third ‘control’ group, offered the product at the present price. You could then gather data about how the changes affected demand simply by recording the volume of sales.

To give accurate and reliable results, however, only one variable should be changed in an A/B test, with all other factors kept constant. If more people see price A than price B, for example, the demographics of the shoppers are different, or shop layout or user experience differ, it is hard to draw robust conclusions that the results you get are down to price only.

Application proposal

In a store, it’s hard to control so many different variables at once, which helps to explain why A/B testing has grown in popularity with the rise of eCommerce. Through an online store or web search or even social media, it’s relatively easy to send different people to different landing pages for the same product, keeping numbers constant and controlling for known demographic factors. Online activity also gives you a greater range of data to work with on top of plain sales figures. For example, you can count click through rates from an advert to a product page to gauge initial interest, you can measure cart abandonments at different prices and so on.

Recommendations

Overall, with a large enough sample size (again, test and control groups should be counted in the hundreds), pricing experiments should give you the most accurate and robust data to use to plot your price-demand curve.

Once you have your results, you can then carry out analysis to decide if the expected impact of a price change would be good for your business or not. If you have carried out pricing experiments, with split tests at enough different price points, you might be able to plot a standard price-demand curve as shown in the milk curve (Fig. 1) directly.

Now it’s your turn

Which of these 3 options is the right one for you?

👉 We recommend you choose to approach market experts if you are looking for quick results and don’t have sufficient customer and sales data at hand for the moment.

👉 If you have a loyal customer base and the resources to interview at least 50 customers, the survey of existing customers would work best for you.

👉 For the best and most reliable results, pricing experiments are the way to go. We recommend this method especially for online businesses, which can conduct price experiments easily in their online shops.

th!nkpricing is a brand of Smart Pricer. We are making professional pricing accessible to everyone by offering a platform to understand, simulate, and optimize your pricing with machine learning-driven algorithms and advanced demand prediction.
Want to stay in the loop and become a #pricinghero? Subscribe to our thinkpricing newsletter to not miss any upcoming blog posts.

3 proven steps to implement a pricing strategy

In our last blog post of this series, we talked about what ticket sellers can learn from Amazon’s pricing strategy to get ahead of competition. But how does an organization based on ticket sales decide on the optimal price?

Many Marketers and ticketing managers still base their pricing strategy on static excel sheets, which can lead to missing out on potential revenue. Pricing is fundamental to a business’ overall success and it can be difficult to establish a pricing strategy in a way that guarantees your strategic goals.

Your ticket prices impact revenue, cash flow, service features, and branding. Nowadays, successful businesses have a well-planned long-term pricing strategy to optimize customer growth, revenue and utilization of capacity.

What are the main functions of pricing for your business?

According to several studies, an increase in average selling price of 5% gives an EBIT uplift of about 20%. So why does pricing have such a significant impact on profitability? The answer lies in understanding and analyzing customer value.

Your ticket pricing needs to:

  • Reflect the perceived value of your service
  • Match the market’s willingness to pay
  • Support your brand and position in the market
  • Optimize your profits
  • Impact customer behavior
  • Improve customer satisfaction

What to consider before planning your pricing strategy

To be sure that your pricing reflects your perceived value, it is best to evaluate your brand and identify all relevant distribution channels. This allows you to develop the most effective pricing strategy.
To maximize your total revenue and profits, you need to A/B test your customers willingness to pay. This is important, because higher prices are linked to lower ticket sales and you may achieve more revenue with fewer units sold.

Three steps to pricing strategy

Three steps to implement a new pricing strategy

1. Clarify your strategic business goals

Common goals are revenue and profit uplift, increase of booking lead time, boosting your online sales, as well asand shifting demand from peak-times to off-peak times.

2. Understand your customer behavior

Studying hHistorical sales data shows the development of your ticket sales. To increase revenue, you should understand your customers’ demand and capture their willingness to pay.

3. Test different pricing scenarios

How will your sales cycle change when you adapt your prices over time? A simulation is the best way to model your pricing changes, allowing you to test multiple pricing scenarios and find the right strategy for your business.

Implement, learn and adjust

Once you have discovered the best pricing strategy, you can implement the new prices. However, don’t just let the system run unobserved for the next years.

Constantly checking the results and adjust the parameters will fine tune the sales efforts and enable best results. Keep full control of your pricing operation and check your KPIs regularly to learn and improve over time.

About us

Smart Pricer provides ticket sellers around the globe with the necessary tools to increase ticketing revenues, online sales, and off-peak attendance. Over 10 years of airline pricing experience and millions of ticket pricing optimizations make us the go-to pricing partner for Ticketmaster, FC Bayern München, UCI, and Zermatt Bergbahnen, among many others.

We are currently developing the new Smart Pricing Software Pricelabs. For more information and a demo of this new level price optimization software, please contact info@smart-pricer.com.

Stay tuned for part 4 of our Pricing series – coming soon! Subscribe to never miss our updates again.

Read more from our blog series about the future of pricing:

Part 1: In times of digitalization, data-based pricing is not a choice, it’s a must
Part 2: How Sports and Entertainment venues learn from Amazon to get ahead of competition

In times of digitalization, data-based pricing is not a choice, it’s a must

With the coming of the Digital age, companies have more information on customer behavior at their fingertips than ever before. Access to valuable insights has grown exponentially with the influx of data being captured through interactions with products and services, website, loyalty programs, and other touchpoints.

More and more companies are already leveraging the power of data based decision making to understand customer behavior and customer product preferences. This analysis is leading to a fundamental transformation of how they approach product improvements, business strategy and marketing campaigns, focusing on customization of content for their target customer base.

The understanding of consumer behavior and the insights it brings is allowing the continuous improvement of existing business models and the entry of companies into new ones. Companies have stopped relying on experience or their “guts” and instead are turning to data science and machine learning to derive strategies using the unending stream of data provided to them by their customers.

The chance to optimize your pricing through data analysis

Pricing remains mostly a manual process, with many business missing out on strategic revenue gains by not implementing data driven pricing strategies. This is surprising because most industries and companies have started using data driven decisioning in their other strategic business areas.

We recommend that companies start focusing on pricing innovation and optimization if they want to stay relevant among their competitors. Static prices do not reflect today’s consumer behavior and your prices should be as agile as your competition and end customer buying habits . Basic pricing is no longer enough to become and remain am market leader, don’t let your competitors force you to react, take control of your pricing.

Why should you improve your pricing?

Why improve your pricing? First of all, the right prices unlock your real profit potential. You never know how much your clients are willing to pay if you don’t analyze your sales data. But pricing is more than just profit optimization. The right pricing strategy also enables you to influence the demand for your product or service over time and incentivize specific sales channels like your Webshop.

Transformation of any business is not achievable or efficient if it isn’t data driven and Pricing is no different. Large, and more importantly reliable streams of precise data are redefining industries and reshaping the way they operate. In the end, data-based pricing reflects the value your customers percieve from your product or service and should be a key indicator about the effectiveness of your pricing strategy.

Change your pricing processes to get the full potential from your product or service

To make pricing a key revenue driver in your business, pricing strategies and processes must change as well. A company without pricing processes built on all available data and taking advantage of advances in machine learning and artificial intelligence will not be able to develop competitive and high-demand products for their target customer base.
In order to set the prices that work best for consumers and the strategic goals of your business, you can start to allocate your data, understand the real numbers behind your pricing and execute new pricing processes to reflect the needs of your customers.

Currently, few companies have a well-defined and executed process for pricing innovations based on a proven price-revenue simulation model.

Data analysis and data-based pricing will change how even the smallest companies do business as data collection and interpretation become more accessible. New cost-effective technologies are constantly emerging and improving that making it incredibly easy for any organization to seamlessly implement pricing solutions that help grow your business.

About us

Smart Pricer provides ticket sellers around the globe with the necessary tools to increase ticketing revenues, online sales, and off-peak attendance. Over 10 years of airline pricing experience and millions of ticket pricing optimizations make us the go-to pricing partner for Ticketmaster, FC Bayern München, UCI, and Zermatt Bergbahnen, among many others.

We are currently developing the new Smart Pricing Software Pricelabs. For more information and a demo of this new level price optimization software, please contact Patrick.schreiber@smart-pricer.com.