Mastering Dynamic Pricing

  6 min 35 sec to read
Mastering Dynamic Pricing

BY Mahendra Shrestha

Marketing academicians, as well as practitioners, are overjoyed by the concept of various marketing tools, especially promotion and advertising, where one can indulge in the exhilaration of creativity and showbiz. Similarly, if you visit any library worldwide, you will find thousands of books on promotion, advertising, sales, and now, digital marketing. However, the concept of pricing, both in terms of qualities and quantities, is scarcely covered in any library or even on Wikipedia. Marketing has become synonymous with sales and advertising, so what does it have to do with pricing?

While we engage in various advertising promotions and create/update various distribution channels as part of our marketing solutions for the brand's prosperity and market share, we barely scratch the surface when it comes to pricing. Perhaps we have relegated pricing to the realm of finance or economics, or maybe it necessitates extensive number crunching, curves, and statistics that lack the allure of fascination, colour, and emotion that we can become captivated by.

Nepal is projected to have an economic growth rate of 4.4%, while the inflation projection stands at 7.8% in 2023, according to a review by the International Monetary Fund (IMF). However, due to the post-COVID scenario, the Russia-Ukraine war, liquidity crisis, and foreign reserve deficits, there has been a significant surge in interest rates. Unfortunately, as marketers, we were neither prepared for this situation nor were we able to execute a responsive price change program that could facilitate the transition of prices from producers to consumers so that businesses could be revived. It was possible to consider reducing product sizes or limiting services that we offer to adjust the perceived value impacting the gross profit. Creative price management stands as a vital tool to mitigate the harsh impacts of inflation.

Moreover, there exists a pricing taboo where once a price is finalised, it is believed that it cannot or should not be altered. The notion of standardised pricing is upheld for enhancing sales and ensuring a cohesive product proposition. Finance and accounts departments are entrusted with pricing management as it relates to government taxes and duties. These practices, rather than being taboos, have evolved into established norms for pricing in Nepal. This phenomenon could be attributed to Nepal's marketing landscape, which resembles that of the West in the 1970s. Western countries are at an advanced stage, and are practising pricing with other tools of marketing at maturity. They can afford to hire pricing consultants, like we engage advertising agencies for brand management and promotion. We can feel it only by tracking the continuous price changes by multinational companies operating in Nepal or observing price fluctuations during the first month of the fiscal year due to alterations in the duty structure of the new budget.

There is a widely used adage in business operations - revenue is vanity, profit is sanity, and cash flow is the King. This adage carries a dual meaning but holds immense significance in business practice. Certainly, all businesses aspire to achieve growth in revenue, profit, and, most critically, cash flow. Each of these elements holds its own contextual importance. However, the linchpin connecting them is the pricing of products and services. To elevate all these metrics, pricing must be optimised or set at the maximum level. Failing to do so will result in decreased gross profit when revenue drops, and cash flow will be negative if low pricing is done, thereby affecting overall business operations.

The price of a product or service is best understood as the comprehensive reflection of the perceived value (product, brand, experience, post experience) by the consumer or user. Price and value are not disparate entities; rather, they are intricately intertwined aspects that become clearer when viewed together on a canvas. The price you get with the value you have offered.

Herman Simon, Chairman of Simon-Kucher & Partners, a price consulting firm, defines price as the overall reflection of perceived value of the product or services in the eyes of the customer. When customers perceive higher value, they are willing to pay a higher price, and conversely, when perceived value is lower, the price paid is lower. One important thing we need to frame carefully in his statement is at the continuation of value that has to be always at the top of the competition, otherwise the perceived value will decrease and so does the price.

Pricing can be effectively managed through three stages. First, create value by offering best services and product quality and charge optimum price. Second, communicate value through unique selling propositions (USPs) or by aligning with intangible values that set products apart and maintain relevance. This involves elements like packaging, product placement, advertising, and public relations. Lastly, value retention is achieved by providing a satisfying post-consumption experience, fostering continuous willingness among users to make regular purchases.

The modern world is characterised by its dynamism, where external influences — whether positive or negative — significantly impact economies and markets of all sizes. Competition is no longer the sole determinant. Instead, consumer perceived values and purchasing behaviour are now influenced by factors such as location, time, weather, and season. Consequently, with the static pricing we may not remain relevant for extended periods due to the rapidly changing and fluid consumer behaviours. With the dynamic pricing, NIC Asia Bank has been able to optimise their pricing and has become a prominent bank in a short span of time. Similarly, the astute pricing strategy of Old Durbar serves as another good example of optimising pricing by finding sweet spots.

The present landscape is marked by the rapid growth of the online economy, with small-scale traders actively leveraging social media, e-commerce platforms, and mobile apps to showcase their product and service values in relation to their pricing. This is happening in real time, with consumer values holding immense sway, leading to frequent price adjustments until an optimum level is achieved. Look at the phenomenal growth of platforms such as Foodmandu, Pathao, InDrive, and Daraz where users as well as the promoters are getting their share of value in respect to the price. However, real sectors are yet to fully embrace the online environment, impeding significant transactions that could leverage fluctuating perceived values against pricing. Given the promising achievements of small traders and technology companies, it is only a matter of time before the real sector also embraces this shift, enabling dynamic pricing practices that harmonise with perceived values of the consumer.

Marketing professionals with decades of experience often display naivety or become defensive when confronted with pricing changes within an organisation. This is because these alterations in pricing tend to push them out of their comfort zones, or they might lack the requisite experience and expertise in pricing management. Pricing management has become an event rather than a continuous process like brand development. Marketing professionals have a plethora of practices and anecdotes related to various other marketing tools, but pricing management might be a relatively uncharted territory for them.

Additionally, it is essential to take into account the entrepreneurial capabilities of the management. These capabilities are instrumental in establishing organisational structures that allow for the open sharing of Management Information Systems (MIS) across all relevant parties, particularly marketing professionals. The marketing department or professionals should be granted direct responsibility for assessing the pricing landscape within the broader market context. They should engage in frequent discussions and strategic planning sessions to devise various creative pricing programs, execute them, and subsequently evaluate their effectiveness, so that they don't squander the value the organisation has cultivated in its products and services. In effect, pricing remains optimised in alignment with the changing perceived values of consumers. 

(Shrestha can be reached for comments at: [email protected])

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