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Dynamic pricing: Be more open about what you are doing

August 26, 2005 |

When it comes to dynamic pricing, companies are recognizing it's important to be fair, and customers are becoming more knowledgeable about what is going on with pricing. They want things to be more transparent.

Wharton’s marketing professor Jagmohan S. Raju says companies can engage in flexible pricing in a way that minimizes customers’ potential antagonism: They can be more open about what they are doing. “Companies are recognizing it’s important to be fair, and customers are becoming more knowledgeable about what is going on with pricing. They want things to be more transparent. Transparency does not mean not charging different prices; it means companies being open about their strategies. Companies want to make sure their existing customers are happy, and their prices have to be in line with that goal. There is a recognition that customers are more knowledgeable about prices and can talk to each other about prices…. This does not mean that companies cannot charge different prices, however. I think they can still do that.”

Most observers agree that consumers will have to become accustomed to flexible pricing because it is here to stay. Fader says the companies, offline and online, that will benefit most from dynamic pricing will be those that conduct frequent experiments with pricing strategies—continually charging higher and lower prices to different people, offering coupons, discounts and other incentives—to see which work best at improving the consumer’s shopping experience and increasing revenue and profit.

“A lot of learning comes by experimenting,” Fader notes. “Companies that know what experiments to run and read and act on the results are going to get richly rewarded. I’m looking for the time when we have electronic price tags on shelves in stores instead of bits of paper so that retailers can change prices during the course of the day or even as customer X is walking down the aisle. Companies will try it, and some will do it stupidly. But some will do it well and find ways to keep customers locked in and keep revenue flowing in.”

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