It’s a myth that price optimization and dynamic pricing are the same thing. Price optimization is close to the bottom of the pricing evolution. Dynamic pricing is pushing towards new heights. Let’s bust this myth!
Thousands of years ago each price was negotiated. You can picture the scene. A dusty market in the middle east. A seller at his stall. A shopper approaches. They size each other up. The seller asks the shopper questions. “Where are you from?” “What are you interested in buying?”
The seller uses the answers to create a profile of the shopper. He uses this profile to decide on which price to offer the shopper. He wants it to be the highest acceptable price. The shopper wants the lowest price. In the end they’ll agree on one price or they won’t. A sale happens or it doesn’t. Whether the sale happens or not is mainly a function of price.
That’s how it used to be. Personalizing prices maximizes revenue but it wasn’t efficient. But efficiency didn’t matter back then.
Over time we moved to fixed prices (point backwards “F” on the curve above). It wasn’t such a long time ago. And it didn’t happen exactly everywhere (basically the last one hundred years in the West). But the advantages of fixed prices were clear. In fact, they were seductively simple. If you know the price you’re selling at then you can easily calculate your costs and forecast your profit margin.
The only missing piece was the number of units you would sell. Lower prices sell more but with lower profits, too. Higher prices bring higher profits but fewer sales. If you have to pick one price you miss out on giving a lower price to people who will only pay less (otherwise they don’t buy). And that fellow willing to pay a higher price gets a great deal…your standard price. You could have made more from him.
Standardized prices left so much money on the table that – despite their seductive simplicity – people began moving away from it years ago. They called the next step up the curve “price optimization.” That’s a general term. In practice it meant choosing a price per country and/or rounding the cents to .99 or .95. It was a small step up from standardized pricing. After all, the population of a country is diverse.
So what comes after price optimization? What’s the next step up on the curve back towards maximizing revenue?
In 2016 we now have the technology, skilled teams and access to data to move much further up the curve towards dynamic pricing. Giving each person the right price for each product at each moment. To do this requires artificial intelligence. It’s further up the curve than we’ve been in awhile. Come join us. The views are better up here. You can see a lot more money.
Price optimization is a slight variation on fixed pricing, the most basic level of pricing. It’s not even close to dynamic pricing. Myth busted!
(note: Yes, that curve is the upside down Gateway Arch. I did my MBA at Washington University in St. Louis. Go Bears!)