Myth Busting: “Everyone will play a game to get lower prices”

http://blog.vendoservices.com/vendo-blog/2016/04/25/myth-busting-everyone-will-play-a-game-to-get-lower-prices

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There are a few common responses we hear when introducing dynamic pricing. One of them is this: “Everyone will play a game to get lower prices.” Like maybe everyone will buy a crappy Windows machine.

The fear behind this myth is that dynamic pricing will lower revenue. Since the goal of dynamic pricing is to increase revenue we’re going to take a serious look at this myth. And then we are going to bust it.

Device is one of the many factors we look at when trying to understand a shopper. It’s true that if we only looked at device we would offer lower prices to people on crappy Windows machines. Our data shows that they tend to spend less when we offer them normal and higher prices. However, our data also shows that rich people spend more with lower prices and poorer people spend more with higher prices. People at two in the morning spend much more than people at two in the afternoon. Visitors from San Jose spend more than visitors from Los Angeles, etc. When combined with all of the variables we use to understand a visitor device is not a very powerful indicator of which price will generate the most revenue.

The myth that everyone will play a game to get lower prices is based on the idea of the cheap, coupon clipping consumer. She does exist. She has always worked hard to find the cheapest price for your products.

This shopper is scouring the internet for your “discount codes.” He’s waiting for special seasonal offers (like buying Christmas presents at clearance in July). She’s buying reduced price trial offers and cancelling immediately. Or he’s not buying at all because he is trying to find a substitute for your product.

If the visitor is cheap we want to know that. We’ll give them prices that get them to buy rather than surf away.

Back to the myth. Will everyone start playing a game to get lower prices? Let’s take a look at the industry that invented dynamic pricing decades ago to see what their experience has been. We all know that airlines list the lowest prices for a flight two months before the plane takes off. It’s also common knowledge that a return flight that includes a Saturday will reduce the price significantly. How many of us book flights two months before with a Saturday stay? We do it when it is convenient. But most of the time it isn’t and we are ok with paying a higher price. It hasn’t radically altered consumer behavior. Cheap people do it or they don’t fly. The rest of us do it when we can.

Dynamic pricing is focused on revenue. Getting the most people to buy at the highest price they are willing to pay. Yes, some cheapos won’t pay full fare. They weren’t paying it before (through discounts, etc.) or they weren’t buying. Dynamic pricing gives you a chance to find the people who will only buy at a relatively low price and give that price to them. Matching the buyer with the right price grows your revenue.

Most people who buy aren’t cheapos. They won’t go far out of their way to get a lower price. But for those who are, you’d rather identify them and make the sale than not.

Let’s look at our data. We’ve used dynamic pricing with billions of profiles. Sometimes we show lower prices, sometimes higher. The result? We’ve increased both conversion rates and lifetime value. If the myth that everyone would game pricing were true then conversion rates would go down (as visitors reject price after price until finding the lowest one) and lifetime value would also drop as visitors spend less. That’s not what happens. Consider this myth busted.

Myth

Everyone will play a game to get lower prices

Fact

Cheapos already play the game.

(You’ll make more with them and everyone else with dynamic pricing.)

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