Real time pricing: Is it for you?
I am "CA" Atreya (PMP, MBA), the author of this blog. I help businesses in Atlantic Canada achieve their BHAG successfully. You may subscribe to this blog using a feed reader (RSS).
Have you ever asked fellow traveler the price s/he paid for the air ticket? Chances are that the two of you would have paid different fares – for adjacent seats. You knew this, didn’t you? If not, welcome to the world of variable pricing. The price they charge depends on the country of booking, date of travel, destination and how much you are willing to pay, among other things.
Airlines are not the only ones who are using the power of price discrimination as a path to profitability. Power companies in the US are already rolling out variable pricing models (Letting the Power Company Control Your AC - Wall Street Journal) They are putting sophisticated tools in consumers’ hands so that they have the information to determine their pricing model.
Even the auto insurance industry (Norwich Union –UK) has a pay as you go model where the insurance company charges premiums based on variables such as time of use, distance, expected traffic conditions, etc.
Car rental companies have practiced this to a point where it is a science. Depending on the location, your country and season you can get significantly different quotes for the same vehicle.
Is variable pricing for you?
Variable pricing is not for everyone though. Remember when the then Coca-Cola CEO, M. Douglas Ivester, floated the idea of variable pricing? (I think it was in 1999.) The word “gouging” was thrown around quite a bit. And of course, Pepsi was quick to exploit this. But I digress.
For one, you need to a firm grasp on your cost structure. Most small businesses pick a number out of the hat (or elsewhere) and quote that figure to the client. That figure sticks. Guess what you have just placed a cap on your revenue. In fact, some small businesses do not even track employee time – which forms a significant portion of the costs. Secondly, you need to transact one to one with your customers. For example, airlines, rent-a-car companies: they all deal with you one-on-one. Variable pricing won’t work with a toothpaste.
Compute your cost structure
The initial step to real time pricing is first getting your fixed pricing right - especially if you are just starting out. Some of the variables I take into account when developing a pricing strategy includes:
- Costs – both fixed and variable
- Economics – essentially this is supply and demand.
- Brand – this will determine how much premium you can charge and get away with it
Note that none of these variables ought to be taken in isolation. All variables are integrated with each other. Having an understanding of your costs will enable you to play with the margins; understanding the market (demand and supply) will enable you to “guesstimate†the cap the market places on your product or service; which in turn is determined by your brand (perception of the market on your product or service). These three are by no means the only three – but the important three. The other variables such as competitor pricing, regulations, etc. only add to the mix.
Getting to real time pricing
If you have been in business for a while, you are sitting on a goldmine: your customer data. Using the right technologies and human resources, you can convert this data into information that will help you develop your variable pricing model.
Real time pricing requires a completely different mind set. If you are a small business, chances are that you will definitely need cash upfront when you make the sale. Moreover, your objective will be to ensure your income stream does not fluctuate wildly. These are the two important strategic decisions you need to make right at the outset.
I’ll get into the details on all the variables you need to take into account for real time pricing in my follow-up post.
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