Dynamic pricing, everyone is talking about it, and it is said to be the ideal strategy for online retailers. The strategy is being employed by organizations such as the airlines, and it allows them to change the prices of the services offered to a similar set of customers. What is peculiar is that the level of fluctuation is tremendous. A drastic price change may be quiet typical to the domain, but smaller percentages of price swings are common. There are indeed various reasons why, today online retailers employ this pricing strategy. This strategy can indeed help with short term gains, but will definitely affect long term profits. What retailers need to understand is that the prices they set is not only going to affect their brand in the mind of the consumer, but it is also going to affect the way they shop.
Competition Marginal Analysis
This is one lesson that a few companies have learned, but it’s been the hard way. About a few years ago, some companies received a lot of grief from their customers, as they had made purchases early, and were extremely disgruntled given the announcement of price drops and quick discounts, the same was felt when prices were increased suddenly. Both cases suffer losses in terms of consumers as well as in market share.
Upsteam Commerce. When a retailer does start using dynamic pricing, customers on realizing that they have been charged more than others, will start screaming about how unfair the strategy is. The problem arises when trust becomes an issue with retailer. Especially with those companies that take a pledge not to mark up their costs, to more than a certain percent that is low. In an environment that is riddled with inconsistent prices, this pledge does not reinforce trust amongst consumers. Predicting the Future of Retail.
One cannot help but wonder, if customers do not question dynamic pricing in hotel and airline industries, why is such a racket created for other online retailers?Hotels and airlines have to use dynamic pricing and this is where the difference lies. These two industries, differ from retail in two aspects, one is that their products, which is hotel rooms and airline seats expire after a certain point, and since the demand is uncertain, the prices can vary to a large extent. These conditions make it necessary for these companies to change their prices as the demand changes. Psychologically it gets easier for travellers to understand high prices, as they book tickets at the last moment and enter a plane that is jam packed.
Two outcomes are possible, if retailers continue to change their prices in such a drastic fashion. They will lead to losing out on brand loyalty. What is more important is that this strategy can completely change how people buy products online. Now, they will not go to their favorite retailers, as there is no trust remaining and they will be forced to compare prices to make a decision. This strategy only leads retailers to push consumers towards buying the lowest price products or services and this may not be in the best interest of the retailer.
What businesses should understand is that how they price their products, will affect their brand. So, keeping this in mind, retailers online should no completely do away with dynamic pricing, but use it wisely. Do not let customers find out any other way that you use dynamic pricing, but let them know blatantly, if they do receive lower prices after they have already made a purchase from your site, you should offer refunds, you could also have a cap on the percentage of price fluctuation that you may allow, and through prime programs, automatic refunds to customers could also be made.