Monday, July 30, 2007

What Is The Best Pricing Model - Dynamic or Static?

An article in the summer MIT Sloan Management Review on dynamic pricing reminded me how much I dislike the concept of variable and negotiable pricing. Dynamic pricing is described by author Arvind Sahay as "where prices respond to supply and demand in real or near-real time." Sahay suggests that dynamic pricing provides a way to "reap higher profits" in every individual sale. That sounds well and good however my concern with dynamic pricing is that it also offers a way to frustrate, antagonize and anger customers in every sale as well.

The airline industry provides an excellent example of how dynamic pricing works against the airlines best interests. The pricing has become so variable for airline tickets that the flier or prospective flier never feels comfortable that he or she is receiving a fair and reasonable price. The stressed out customer then begins to scurry around seeking out a better price or confirmation that this is the best possible price they can get. Will this customer end up making the sale with the original airline that they looked at? Or will the dynamic pricing model result in lost sales to the airline?

How about the ultimate in variable pricing, car shopping. How many people shudder at the mere thought of purchasing a car through a dealership and why is the experience so distressing? Looking at new cars is not painful, nor is the actual purchasing of the car which most people find exciting. The cringe factor is from the negotiating game - "Wait while I talk to my manager". How many people browsing in car dealerships decide to walk out the door because they don't have the fortitude on that particular day to go through the variable pricing negotiation process?

At my company, Nobscot Corporation, we have a sliding price scale with smaller companies paying less for their WebExit subscription and larger companies paying more. This coincides with the amount of resources a large company will use relative to a smaller company. The subscription rate for each company size is fixed at the most reasonable rate that Nobscot can offer so that all subscribers know that they are paying the same prices as every other comparable organization.

Often during the sales process, a future client will ask if we will lower the price. Our first reaction is always the same, "would that be fair to our good clients who have been paying us our standard rates?" Of course not. Our second reaction is "if you don't feel our exit interview system is worth the subscription fees, then you probably shouldn't be choosing to work with us."

Static reasonable pricing as opposed to dynamic pricing may not maximize the profits on the individual sale but by giving prospective customers the peace of mind that they are getting the best deal possible, static pricing increases both the number of sales and the satisfaction level on those sales. Just because a company can over-charge customers doesn't mean it's a good idea.

3 Comments:

Anonymous Anonymous said...

Static is not necessarily best at all times and for all situations. The justification stated, that it would not be fair to other similarly-sized customers, sounds reasonable, but is it? Just because they are similarly sized doesn't mean they have similar abilities to pay. Some may have a greater need for the services while having a much smaller profit margin. Some may actually be losing money and thus hope the services will help change that situation. Some may be willing to enter into a longer-termed contract in exchange for a lower rate. So just because they fit into an arbitrary category about size or revenue doesn't absolutely mean that their pricing should be the same. Moreover, how would any of these companies, most of which move in very different circles, know what you are charging your other customers?

8:10 AM, August 01, 2007  
Blogger B. N. Carvin said...

Thanks for the comments.

No question that size is not a perfect indicator of ability to pay. That's okay because we seek fairness first; ability to pay second. Even if the buyer in a cash strapped company finds it difficult to pay a particular price they will still find comfort (or rather they won't find discomfort) in knowing that the price they are being offered is the same and best possible price for all similar companies. That still feels fair. It's easy for a buyer to reconcile that it's not the vendor's fault that they are having financial difficulties. Conversely, when the price is up in the air, the buyer has no idea if the negotiated price is fair. That is not a good feeling and many will walk away from the psychological discomfort. Too many companies in my opinion discount the importance of psychological comfort in the sales process.

I'm more concerned, though, with your question asking how will a company know if they are being over charged? Isn't that a little like suggesting that it's okay to steal if the shopkeeper won't catch you? In our company, we view our clients as VIPs. If we gouge money from them - because they won't know the difference - what does that say about how we treat clients? What kind of culture are we creating with our employees relative to how they should treat clients?

It's also wishful thinking to believe that customers will never be aware of how much others are paying for the same product or service. They might not know at the outset or at the time of the sale but what about down the road? Is that something you would be happy for them to discover? If a good client called up one day and asked why the company across the street was paying half as much as they were, how would you respond? Would they have a right to feel cheated? Perhaps this strategy works well for one-time sales but if you seek long term or repeat customers and/or customer referrals then a little fairness can create a lot in extra profits.

4:05 PM, August 01, 2007  
Anonymous Anonymous said...

You stated, "I'm more concerned, though, with your question asking how will a company know if they are being over charged? Isn't that a little like suggesting that it's okay to steal if the shopkeeper won't catch you?" Such a distortion of my words! Where, exactly, did I state that it's ok to over charge someone or say that "it's okay to steal if the shopkeeper won't catch you"? My comments, taken in context, neither say nor imply those things.

"Dynamic" pricing is perfectly reasonable in certain situations. It would generally not work well for a plummer to charge varying hourly rates to homeowners, but for a turnaround consultant who takes on a risk for non-payment to varying degrees in each engagement, negotiating a higher price to reflect greater risk seems perfectly reasonable. If that client later asked why he had to pay more, the answer would be, "because with your company and the particular hurdles it must overcome, I face a greater risk of not being paid for my work."

I don't really disagree with most of what you are saying. (Though I think you are mixing together arguments of "feeling fair" with "being fair" when they are two different things.) But I don't see how my comments suggest it's ok to "gouge money from [companies}."

2:25 PM, May 08, 2008  

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