Sunday, March 8, 2020 |
…AI-software automatically (and in real-time) adjusts the pricing of products within an online shop, which is triggered by a shift in competitors’ prices.
Like any revenue management technique aimed at maximising profit, it has its practical pros and cons to consider before deciding whether or not to adopt.
Within this article, we will explore the real risk-benefit profile of using dynamic prices within your eCommerce store.
Where does dynamic pricing come from?
Rooted in the economic theory of price elasticity – the practice is supported by a school of thought promoting the idea that,
“…’supply and demand’ pull against each other until the market finds an equilibrium price.” – https://www.investopedia.com/terms/l/law-of-supply-demand.asp
If we adopt an uncertain, market-led mindset…
…the finding the equilibrium price provides a safe haven.
Ultimately, it is where we would want to be in order to maintain a keeping up of appearances with the rest of the pack.
Falling out of the statistical reference group would mean we would no longer be shoulder-to-shoulder with our commercial running mates and therefore either…
…giving away profit by way of…
• charging too little, when customers would be willing to pay more,
• or charging too much and turning away custom to our more moderately priced neighbours
However, not all of us think like this.
Some would ask, is dynamic pricing a good practice?
To answer the question, try asking yourself, can I justify my price changes?
For example…
…how would I explain to two customers, charging two different prices for the same product, at the same time – without there being a valid reason why?
• Does competitor pricing give me good enough reasons to suddenly change my price, with my customers?
• Would customers trust me for future purchases if I simply followed my competitors?
• Would my brand hold credibility as a leader if it takes the lead from its peers?
• Is this really opportunism masquerading as business?
• What if customers recommend my products by word of mouth to their friends, quoting the price they paid – only for their friends to discover totally different prices?
• Is this an abuse of AI?
These are all questions that you might want to ask yourself before making a final judgment on dynamic pricing.
It’s worthwhile considering – so that you are sure about where you stand in principle.
People aren’t lemmings
There are many problems with the price elasticity model.
Most of all the misrepresentation by economic theorists that people who buy products and services are lemmings.
Undiscerning and unable to make decisions based on anything other than what everyone else is doing.
Let’s dare to think – perhaps it is actually entirely possible that a consumer would actually pay more for a product or service on the basis of trust or integrity of vendor. https://www.thedrum.com/news/2019/07/31/how-brands-can-regain-consumer-trust
Are you misjudging your customers?
Is psychology really predictive or misleading?
Practices like dynamic pricing really work on the basis of psychological theory that suggests people behave according to what is around them.
In other words, you can influence people’s behaviour by what they see.
Whilst influencing peoples behaviour might be possible – would a more profitable enterprise focus be investing in a better customer experience, for example?
AI-assisted pricing software might provide the comfort of thinking you’ll always be ahead of the competition on maintaining optimal margins – but who’s to say this really is true?
Could you have sold more that month or year should the expense of AI have been diverted to more traditionally mission-critical functions like customer service?
Perhaps our desire to make optimal gains has overtaken our observation of the fundamental precepts of good business and value for money.
Intrinsic vs. extrinsic value perspective
FACT:
Most investors follow the market (extrinsic – i.e. receive a mind from everybody else)…
…also,
FACT:
Smart investors lead the market (intrinsic – i.e. make up their own mind).
AI and dynamic pricing is the art of market simulation. It frames your business according to what the consensus says.
Question is…
Would you make more profit setting your own prices despite what others are doing?
Or, does being carried away with mob mentality present better rewards for your business?
Let me attempt to settle this debate, once and for all with just two words:
Warren & Buffet.
Warren Buffet is “…one of the most successful investors of all time.” – Forbes, and has accumulated a personal net worth of $81.2 billion.
Also, known for being one of the very few who made money whilst the world was losing money during the 2008-9 Credit Crunch.
Safe to say, he really knows value more than most.
Whilst the whole market rides on the rollercoaster rise and fall of hearsay, one man stands resolute and set in his ways when it comes to esteeming what’s really valuable.
Known for his intrinsic perspective on how he values business assets, Warren repeatedly bucks the mass-market trend to his gain and scores massively, by standing alone where others wouldn’t dare to go.
What can we learn from Warren’s investment technique for eCommerce revenue management?
Having your own mind on pricing and value will beat trusting a computer algorithm – to the tune of billions of dollars.
FACT, again.
Conclusion
Pricing does move and therefore is dynamic by nature.
However, the fundamental question is:
…should we spend our efforts investing in computers to keep us ahead of our competitors,
Or should we simply focus on getting the basics right with our customers?
Market indices crash in a moment, but age-old investment sensibilities seem to find refuge in any financial climate – no matter how bleak.
Ask Warren Buffet.