The price is right

Dynamic, variable - what's the pricing strategy for you?

I made a note last week of a really interesting LinkedIn post from Glynn Davis of Retail Insider querying why more retailers don’t use dynamic pricing in the way that travel operators and some leisure operators do. It’s been bubbling around in the back of my mind since, not least because I have some form in this space having implemented variable and dynamic pricing in the cinema sector.

Pricing strategy is enormously important to any retail or hospitality business. At some level that seems obvious - these are businesses with high fixed costs and often relatively low net profit margins, so any tweak to pricing that adds a little bit more to the top-line of the business can make a huge difference to profits.

But finding the right pricing strategy for your business is tricky. Over the last few months here at Moving Tribes I’ve begun to build series of posts that address a topic in more detail piece by piece (such as the Consumer Megatrends posts), and pricing seems like a similarly valuable area so over time I’m going to come back and think about different pricing strategy options, reviewing their pros and cons for different types of business.

Today, though, let’s focus on dynamic and variable pricing, since that was the original inspiration for the series. And make no mistake, this is an area of pricing strategy that holds huge potential for your business. As you’ll see, some relatively simple tweaks to pricing in the cinema sector were worth tens of millions in bottom line profit, and the same might be true for you.

Let’s define some terms first. When people talk about dynamic pricing they are usually referring to the kind of very sophisticated and fast-changing yield management systems that airlines and hotels use. These are complex models that look at how quickly a product is selling and adjust the price for the next seat or next room based on that data. The algorithms are informed by the fact that what the airline or hotel operator is selling is a perishable good - in other words, if you don’t sell that seat on that plane journey, it is gone forever. That means it is hugely worth varying seat prices to ensure that you fill your plane, usually by selling cheaper tickets to advanced bookers but keeping some expensive seats for last-minute travellers with fewer alternatives.

When I use the term variable pricing here, I’m talking about something which is logically similar but much simpler. The first iteration of variable pricing in Odeon, for instance, just said “we’ll sell out the opening weekend of huge blockbuster films, so we should charge a bit more for those tickets, whilst we will have a lot of empty seats later in the run, so we should charge less for those”. Straightforward to implement, no algorithm or computer programme required.

(You would not, by the way, believe the controversy when we did that - press, movie studios and other cinema operators lined up to tell us how stupid we were. Until they saw how successful the change was, at which point they all lined up to copy it!)

How might that work for you? I always used to wonder at nationwide restaurant chains which printed a single lunch menu and charged the same prices right across the country - as if the optimal price in leafy Surrey was going to be the same as it was in downtown Hull. Notably, a number of chains have cottoned on to this point and now vary their prices by market.

Economists have a terrible phrase for this - they call it “price discrimination”. Putting aside the negative connotations of the word discrimination, all they are trying to capture is the reality that if different groups of people are prepared to pay different prices for the same product, there is value in finding an elegant way to charge them the amounts they are prepared to pay, rather than a single price which will either be too high for some customers or too low for others.

In the restaurant case, the variable being flexed is location (and by implication, disposable income of customer). In the cinema case, the variable being flexed is viewing window (and by implication, the enthusiasm of the super-fan of that blockbuster).

Of course, we see examples of this kind of pricing strategy all around us. It is why the price to see a move varies from the high price at the cinema to a lower price on PPV, to an even lower price on a streaming platform - each designed to be the right price for progressively less interested customers. It is why an advanced train ticket (when you had lots of options to change your journey plans) is cheaper than a last minute one (when you don’t).

So even if you don’t have the kind of product, business model (or IT budget) to think about dynamic pricing and yield management, can you think of ways to amend your pricing strategy to “stratify” (a less toxic word than discriminate) your prices for different types of buying scenario?

But here is the challenge. Not every way of varying prices will work in every business. The straightforward answer to the question posed in that original LinkedIn post (why don’t retailers use dynamic pricing?) is channel conflict. It’s all very well trying to charge more in leafy Surrey, but if those customers can still see your national prices on your website it will all come unstuck pretty quickly.

Restaurant groups get around that by not showing national prices (many now will ask you to input your postcode before they will show you any prices). And of course, you aren’t actually going to consume the meal over the internet!

Retailers, on the other hand, take a huge risk if they charge different prices in store than online, and it simply isn’t a great customer experience. I tried to argue at Game that it was acceptable to charge different prices online and in store because they were such different customer groups, but in the end the negative customer reaction proved me wrong and few retailers still do it.

That doesn’t mean, however, that there aren’t clever ways for a retailer to use a variable pricing strategy to optimise their returns. All of them do today, of course, by having sale periods and full price periods. But what about exploring more frequent changes of price based on what is selling fast and what isn’t? What about using customer-specific prices through a loyalty or membership programme?

All of these are effectively ways of charging different amounts based on different customer needs or market conditions.

Where have you seen variable or dynamic pricing in action? Have you seen surprising examples that appear to work, or indeed any disastrous experiments that don’t?

Do let me know by leaving a comment here or on social media. And watch out for more on some of the other pricing strategy tools in future posts, including the way that Machine Learning might just make you some money!