How Can Organizations Overcome the Resistance to Dynamic Pricing?

By Karthik V J, 
Senior Manager – CEO’s Office
SunTec Business Solutions          

The News

Ticketmaster, the online giant in the ticket-selling industry, received a massive backlash from users for the ticket prices for the GUTS World Tour.1 The prices, that went up to almost $400, were publicly criticized as they highlighted the significant economic divide in America.

The blame for the astronomical prices fell on dynamic pricing, which helps platforms adjust prices based on market demand. Dynamic pricing has often been perceived by customers as a form of profit gauging. As I pointed out earlier, more and more organizations will adopt dynamic pricing, and they must find ways to overcome the resistance to dynamic pricing.

The Insight

Concerts are supposed to be inclusive events that bring people from different races, religions, and economic backgrounds into one single stadium. But of late, the prices of musical concerts have been on an upward trajectory, thereby restricting access to musical events to a privileged few.

The adoption of dynamic pricing has further complicated things. Driven by algorithms and complicated further by the emergence of platforms like StubHub, ticket prices reaching astronomical levels have become common. In fact, tickets for one of Bruce Springsteen’s concerts were reported to have reached $4,000.

But organizations love dynamic pricing. It not only helps them get more bang for their buck by giving them the freedom to charge more when demand is high but also helps them reduce the prices of their products when the demand is tepid. Take away the emotions, and dynamic pricing may be the only tool that creates equilibrium in a market driven by human emotions and fueled by human greed. Hence, it is important to see how organizations can overcome customer resistance.

The first thing that organizations can do is to focus on driving loyalty. Loyal customers do not mind an occasional increase in price as they consider their relationship with the organization to be a long-term one. No wonder that airlines and banks have invested a lot in loyalty programs. It not only attracts customers but helps in retaining them even when organizations are forced to raise prices.

Another way for organizations to help customers overcome their resistance to dynamic pricing is to adopt product bundling. This is why cinemas offer free popcorn and the airlines offer free seat selection options. In fact, research has shown that these potentially ‘small’ gifts have the power to transform the end customer experience, especially for high-value purchases.2 Product bundling enhances the perceived value of the product and helps customers ignore the pain associated with frequent price changes.

The third approach to overcoming resistance towards dynamic pricing is one of self-control. Yes, there will be an urge to go overboard when there is the freedom to raise the prices in line with the demand, but there is always a tipping point beyond which customers will start giving up. Uber, Ticketmaster, and many other platforms have learned it the hard way when the prices increased even beyond the wildest imaginations of the customers. Not only did they face huge backlash, but also lost customers who took their business to their competitors. While it is OK to let systems and algorithms set prices, the context of the situations must be also taken into consideration. Surge pricing after a concert may be OK, but surge pricing during a terrorist attack is not. Organizations must retain some humanity, even if algorithms and systems rule.

It is important to regularly communicate the objectives of dynamic pricing and be transparent as far as possible. Customers can forget quickly, and it is important to remind them that dynamic pricing is not just a tool for profit maximization (don’t say that loud), but also a tool for balancing demand and supply and a great way to find better prices (say that loud!). Organizations need to do away with click-bait price, say no to hidden charges, and help customers see all available options across all price points without pushing sponsored options as the most desirable option.

But beyond all this, there is one more thing that organizations must do to overcome the resistance to dynamic pricing. They must educate their employees, partners, and shareholders about the need for and benefits of dynamic pricing. Surprisingly the biggest resistance to dynamic pricing comes from within the organization. It may be because it may be a difficult concept to understand, and possibly explain, for the frontline salespeople, or it may be because of a perceived sense of unfairness. Whatever may be the reason, organizations must take steps to allay these fears and help employees understand and accept dynamic pricing. Open communication, proper training, and aligning employees’ incentives with the company’s pricing strategy can help mitigate these challenges and help organizations onboard their employees in their journey toward dynamic pricing.

Dynamic pricing is all about managing the balance between supply and demand. The suppliers and partners of an organization play a key role in influencing the availability, cost, and quality of products or services, all of which directly impact the effectiveness of dynamic pricing strategies. Hence, the impact of dynamic pricing will certainly be profound for suppliers and partners. Several key enablers of dynamic pricing such as the gathering of real-time data, accurate demand forecasting, supply chain optimization, cost and margin analysis, competitor analysis, understanding of price elasticity, and technology integration will be possible only if the partners and suppliers are fully onboard the dynamic pricing journey.

All said and done, dynamic pricing is still not practiced in the way it should be. But it is an effective pricing strategy that must be leveraged fully and effectively. As the market landscape grows more complex, there will be a definite increase in the number of organizations and industries looking to leverage dynamic pricing.  It is important to get started on the dynamic pricing journey with the right objectives and with a well thought out plan of action designed to help address concerns and resistance.

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