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Why Dynamic Pricing is better than Price Matching

Mihir Kittur, Co-founder and Chief Innovation Officer, Ugam,


It’s so easy to get into a price matching war with your competitors but is that really the best idea for ensuring loyal long-term customers? Is that the most sustainable strategy for your business overall? It isn’t. Companies that price match to beat competitors (and don’t keep an eye on all products as a whole) do not survive.

As noted in the MIT Sloan Management Review, there are usually no winners in a price war: “The losers are often forced out of business, and the survivors have been known to suffer a long-term squeeze in profitability.”

“Price wars begin when competitors aggressively and repeatedly set prices below established levels. In some cases, companies that initiate price wars engage in self-destructive behavior, which leads to downward pricing spirals that alter industry structures,” wrote Patrick Reinmoeller.

Yes, customers like a good deal, but they also like a good shopping experience and a reliable retailer that has everything they need. Creating that experience should be first priority, as it ensures long-term happy customers (and long-term happy customers will share their experiences with their friends).

Dynamic pricing allows you to be a bit more flexible and set your business up for the long-term. It’s based on supply and demand, customer social signals (e.g. product reviews, Facebook likes), the weather, and even the time of day. There are also opportunities to raise your prices without getting your customers upset—the trick is knowing when they won’t notice or care about the price – a person in need of a shovel in a blizzard is not going to care about the price tag. Likewise, someone buying an umbrella during a torrential downpour to stay dry, may not be thinking about the cost either.

Plus, most consumers understand and accept the social rules established for pricing (like that popcorn at the movies is going to be much pricier than buying it at the grocery store).

Below are the common factors that determine customers’ expectations at check out and things that should be considered when pricing your products.

  • Product availability: If it’s a product that someone needs and it’s hard to find, they will pay the price for the product, no matter what it is. Knowing that about a product and knowing that your competitors are low on stock will give you the advantage, so you won’t have to set a lower price.
  • Location: It’s generally accepted that items bought in New York City (even a pack of gum or bottled water) will be more expensive than that same item will be in the suburbs.
  • Consumer Segment: It’s important to know and understand your customers’ discretionary income and spending history to know if price is a factor in their purchases or if they will purchase certain items regardless of price (a refill filter for their water pitcher for instance, etc.)
  • Instant gratification: A retail store will always have the advantage of instant gratification—someone can take home the product and use it that day. There’s no waiting for a product to arrive or the added cost of shipping. This is why more and more retail stores (and fast food places) are offering pick-up in-store options. Now consumers can avoid waiting in line by buying what they need online and then going to pick it up.
  • Product Popularity: If it’s a popular product that’s flying off the shelves that everyone must have, price is less of a factor in the buying decision for the joy of being cool.
Thus, in knowing the products that people are less likely be looking for a bargain on because of need, popularity, etc., you can focus on the product that makes the most sense to discount once in a while. Additionally, consumers still like a bargain, so offering a promotion or deal for shopping at the store will get someone shopping and encourage them to come back, but will not put you out of business (if done the right way.)

Get more dynamic pricing tips by reading Ugam’s Pricing Intelligence eBook, The Essential Guide to Price Intelligence and Dynamic Pricing.



The Author:
Mihir Kittur is a Co-founder and Chief Innovation Officer at Ugam. He oversees sales, marketing and innovation and works with leading retailers and brands with insights and analytics solutions around their category decisions to improve business performance.
 



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