If only pricing strategies are this simple (courtesy of Zimbio)
In a fascinating podcast with pricing consultant Rafi Mohamed, author of The 1% Windfall: How Successful Companies Use Price to Profit and Grow, Harvard Business Review unveiled some pricing strategies from the grey market resellers of tickets. These ticket scalpers normally sell their wares on eBay, craigslist or other auction platforms, hopefully to generate a profit (or reduce their losses).
The scalping market in the US is huge, generating about US$3 billion of sales a year and resulting in loss of revenue to event organisers. There are four characteristics defining this market:
1) Uncertainty about actual demand results in low Fixed Prices being set for tickets to games, rock concerts and other events. Many sport teams and musicians err on the side of being conservative rather than risk failure at the box office.
2) Fear that setting prices too high may damage goodwill and brand equity for certain entities.
3) Anticipating that demand then to come in waves. There is usually more demand over time. Whatever is sold in the first five days – doubled – is normally the total number of tickets sold. Hence ticket scalpers will buy first and hopefully sell them off later for those who will buy at a later date but can’t find the tickets they want.
4) Unfortunately, the ticket scalping market will also have to set lower prices when demand is low. This is something that sport teams and musicians are wary of once they set it.
To circumvent this, Rafi recommends that companies consider Dynamic Pricing as a strategy. This works like airlines and hotels where prices can fluctuate according to demand. Here, excess capacity can be unloaded at the right price with the hope of “stealing” customers from other hotels and airlines.
Of course, this may be easier said than done as musicians and sport teams aren’t as easily substitutable as say a flight from Singapore to Bangkok. Going for a Lady Gaga concert isn’t quite the same as going for one featuring Tom Jones or Stephanie Sun.
How should one respond then? Rafi suggests these strategies:
1) When demand is high, you should set high prices in the onset and then play with prices later. It is always easier to slash prices rather than increase prices, and this can be dynamically moderated depending on how quickly or slowly things move.
2) When demand is low however, the trick isn’t necessarily to make all prices cheaper immediately. Instead companies should do the following:
a) Try to upsell people who already have an interest to buy tickets and convert them to higher priced seats with the right incentives.
b) Let consumers know through a regular practice which communicates when prices are lowered. A good example can be seen in Broadway concerts where the tickets the day before are usually cheaper for shows that cannot move. Bakeries also slash the prices of their products before closing.
For product-based sales, online retailers could experiment with price differentiation at different times of the day to different customers. Amazon.com is a good example of a company that employs this practice, although it isn’t necessarily embraced by all its customers.
How about brick and mortar businesses?
One good strategy to find out if you’re pricing too high or too low is to ask your frontliners. They’re probably more aware of whether a customer is willing to pay more for a product (“Oh that’s really cheap”), or if a price is set too high (customer picks up a product, looks at the price tag, and puts it back).
Will Dynamic Pricing result in eroding prices and bottomlines?
We’re already seeing this with online deals (Groupon, Last Minute Deals, Deals.sg etc) offering time-sensitive deals of anything from travel packages, spa treatments, restaurant meals to electronic products. Savvy consumers may wait for the right one to pop along before making his or her purchase.
On the flip side, however, I believe that these dynamic prices help to activate a latent group of customers who wouldn’t otherwise have purchased a product or service. By making it compelling, these deals help to reach first timers and could perhaps act as “loss leaders” where subsequent products or services could be upsold to customers for a profit.
What are your thoughts on the issue of Static versus Dynamic Pricing?