Dynamic Prices: Pricing Algorithm in Australia
Do you use the latest algorithms to sway your customers?
When was the last time you changed the price of your online products or services? Does your business use a fixed price system with rarely any price movement? Do you know if your competitors are using predictive pricing analytics? Are your customers comparing prices on a price comparison site? Are your prices up on someone else’s site? These are all relevant questions your business should ask as your competition has probably thought the same thing and even acted upon it.
The online world of pricing is ever-changing and has become extremely dynamic. Hence the word ‘dynamic pricing’.
What is ‘algorithmic pricing/ ‘predictive pricing’/ ‘dynamic pricing’?
It is when prices are provided to a product or service for a business through the use of algorithmic calculations performed by a computer program based on data analysed from consumers, competitor pricing, supply and demand, and other external factors in the market.
A perfect example of an industry that continually fluctuates its pricing is the airline ticket industry using. The hotel sector is very close behind!
Australian online businesses face more international competitors
There is immense competition in the airline and hotel industry and this is why dynamic pricing has grabbed hold of them. One could say these markets have become internationally saturated. The entrance of more airlines and Airbnb has created an industry where there is an endless array of options for consumers so businesses have utilised pricing mechanisms to lure more customer sales.
There was once a time when Australian businesses mainly faced online Australian competition. However, in 2018 we now see a greater number of overseas websites willing to ship or offer their products and services to customers here.
There are few industries that haven’t been touched by this force pricing strategy.
So businesses in Australia need to keep up to date with all the technological strategies offshore competitors are using.
Consumers are always on the hunt for the best price
It has occurred behind the scenes for quite some years now. The important fact here is that most Australian consumers do not know how this system works.
In 2018 it is safe to say that ‘most’ consumers are on the hunt for the best deal for whatever they are buying. The internet can so easily provide this information for them at the comfort of not having to ask, pester, walk in, negotiate anything with any living soul. As great as it is for the consumer it has also conditioned people that the price factor is if not the most important element of a business.
If they are the cheapest for the same product then that website will probably get a bookmark. It’s human nature for them to focus on that bargain.
The evolution of AI in pricing is trying to form a predictive relationship with the consumer. Not all consumers but that 1 consumer. AI already has the ability to analyse data collected from their data trail.
As time progresses AI is zoning in on more data from each user and the ability to make more accurate predictions about what they are thinking connected to the likelihood of an action connected to their thoughts and their business.
On top of all the data collected from their online journeys. Think of how much data can be collected from additional third-party programs. So businesses aren’t just using data collected from customer journeys on their websites and apps but an additional goldfield of other journeys your target market takes. All this data knowledge combined makes for a very predictive algorithm.
Is algorithmic pricing successful?
To a clever customer yes. To a clever business yes. We must remember that algorithmic pricing is a major cog in the wheel that led to the era of the never-ending price wars. Where profits are attempted to be made from very small margins.
When done effectively algorithmic pricing is successful in the notion that your business will increase its chances of obtaining a sale due to many predictive insights are known about your consumer.
The greatest risk in algorithmic pricing Is competition. When your competitors also start using this strategy to gain sales you are then competing against the number one factor you are trying to woo your consumer with. Price. And ONLY PRICE. Once the price is the primary factor a business must then turns its attention to factors which can reduce this and there is only so low a business can win on cost-saving mechanisms.
Cost saving mechanisms works. Amongst this, it can be easy to fall between the crack of why you are focusing so much on price, to begin with? It is to benefit the business and not the user.
So algorithmic pricing does work as long as you don’t become like your consumer. By that we mean. The pricing retail world we now find ourselves in is very similar to a gambler. Consumers are hooked to finding the best price as the internet has paved this way. So, in the same way, a business can hook a customer onto their site a business can also get hooked on winning a war on prices which can ultimately end in ‘the house’ losing.
So how can customers benefit from pricing algorithm?
The price hunter who is not in a rush, the price hunter who reads intodetail and understands your competition not just within the Australian online market but abroad as well will benefit immensely from this. And most of all the price hunter who puts time and effort to research the product and service.
Most consumers do not fall into this category. For many reasons that we leave you to establish. However, they do exist. And this smart consumer is growing in number. Especially from the younger market. The high school students, the TAFE and university students of Australia for example. Those who are more tech savvy but more so more tech confident.
This need for praise at this age and the ability to assist those a bit older than them leads them to find loopholes within the pricing system, in addition, saturating ‘deals’
For this reason. Businesses need to keep an eye on any bargains or sales they place up in anticipation for a ‘viral’ effect.
Isn’t this price discrimination?
Well, there is definitely a moral and ethical question to this pricing maneuver. It is basically calculating a unique price based on who is asking. Similarly to the case if you walk into a store that has no prices on anything. You walk up to the shop attendant and ask for THE price. They answer you but will you ever know if that truly was THE price?
So we see that it’s difficult to state price discrimination didn’t exist before online retailing. There are still countless opportunities for businesses with bricks and mortar or a table, or at a market to price a product or service entirely based on what you look like, what you say, and how you say it etc.
How the question we need to ask is how does a customer prove it? And more importantly is the business within legal grounds to price consumers the way they do?
Dynamic pricing basically does exactly the same thing people did in the past and continues to do but a lot more efficiently.
Repercussions for pricing algorithms?
As consumers access Australian businesses on their own private devices in their own private space it is very difficult for consumers to ever realise how much of a difference their prices are to their ‘neighbour’.
This lack of transparency may backfire if consumers do find a way of establishing who is ‘ripping’ them off. And that is exactly how they will react if they see that someone else got a cheaper price.
Now, whether this occurs through word of mouth or through a business that is out to profit from this lack of transparency is the final question. How consumers react to this is unpredictable. But what is fairly obvious is the customer will not be happy.
Can bricks and mortar adopt to dynamic pricing?
There is no reason why they cannot incorporate it within their business sales system. It has already occurred for quite some time.
For example. Amazon acquired ‘Whole Foods’. For those who do not know, Whole Foods is similar to Coles or Woolworths. It could be seen as the most popular grocery store in New York.
Why are we mentioning this?
Well, Amazon, Woolies, Coles are all in line to use their store purchase app. Basically, the customer downloads this app and they use their app to purchase products in a physical store.
What does this mean? This means the app has probably traced your data trial and has a clear user profile of what you want, how much you will pay for it. The moment you scan a product within the bricks and mortar store the app has most likely predicted what price You will be shown.
The Customised experience? The Customised Price experience
The only problem with this system is people in a supermarket are in very close proximity to each other and it doesn’t take much for person x to ask person y.
“How much was your price?”
“It is $XYZ”
“Waaaa? Mine is $XYZ”
The dots connect and it goes VIRAL on social media. It might not play out this simple, however, what we are seeing is a system that is transparent to a certain degree. It heavily relies upon the ‘privacy’ that people purchase products in. Once those walls are not so transparent the secret is out. So businesses who utilise this price mechanism need to be aware of the potential downfalls.
Test out pricing algorithm for yourself!
Try it out. It is very simple to see in action. The more people to do this to more obvious the price differences are.
Sign into 2 or 3 online airline or hotel sites. Choose well-known ones if you can. Now for 2 weeks do not clear your cache otherwise known as cookies. Do not clear your history and continue browsing the net as you usually do. Now return to this site and enter a few queries. Record the price down.
Have a few other people of varying age groups to do exactly the same and see the price differences.
To make it even more interesting if you have smartphone devices use that as well. We noticed clear price differences on these devices even though we the same user on the laptop.
Stay in front of pricing technology. Simple as that.
Price is a marketing element that we do not see going away anytime soon. So pay attention to all technological systems that are being utilised both here in Australian and abroad.
Price is a crucial factor that customers will always look at regardless of what or who your business is.