Top Myths of Dynamic Pricing

Thierry Arrondo

“The great enemy of the truth is very often not the lie, deliberate, contrived and dishonest, but the myth, persistent, persuasive and unrealistic.” — John F. Kennedy

Let’s bust some myths, shall we?

Brands stay relevant by competing in the marketplace to maximize their revenue. They don’t sit on the sidelines with dusty old myths in their heads.

First, what is dynamic pricing? “Showing the best price for each product and each shopper at each moment.”

It’s not new. It’s as old as the first caveman traders. Animal skins to keep you warm were worth a lot of food in the cold winter. Not so much in the summer (maybe a few nuts?).

For a brief blip in history fixed prices took over in the West because of a lack of efficient tools for dynamic pricing on a large scale. It came up with the rise of mass advertising, particularly fueled by television.

Thanks to artificial intelligence dynamic pricing is back. Fixed pricing’s short regional reign (less than a hundred years, Europe and North America) left behind a few myths about dynamic pricing that we will happily bust here.

Myth #1: “Shop Owners Know The Best Price For Their Products.”

The fact is that shop owners know their costs. They know that better than anyone.

What they don’t know is the best price for each shopper at each moment. How could they? Any small to medium sized company in our industry can have 100,000 visitors a day to his shop. That’s more than one per second. All those visitors are different. How could a shop owner know which price to give each one of them at each moment? Which price will make the most money from each shopper? The mind boggles.

What a company can do is use its cost information to set price floors (ex. $20 for a monthly membership). This insures they are covering their costs. Then they use artificial intelligence to set the best price for each shopper.

They should not risk losing money through fixed pricing. Or, worse, randomly choosing prices without access to the right data and tools. Either approach is a revenue killer.

Shop owners know their costs but not the best prices for their products. Myth busted!

Myth #2: “Dynamic Pricing Is Only Used To Charge Customers More.”

Nope. Dynamic pricing is used to show each shopper the right price for him at that moment. The point of the AI is to find the price that shopper wants to pay for your product. Sometimes it’s higher. Other times its lower. Through a combination of both higher and lower prices it grows your revenue.

Dynamic pricing results can be surprising. For example, our data shows that lower prices cause rich people to spend more money. How did we discover this?

We took millions and millions visitors in the “rich people” category in the U.S. over the last 12 months and gave them high and low prices. We counted how much money our clients made from each type of price. We simply added up the revenue for high prices and compared it to the revenue for low prices. Nothing fancy. The result? Lower prices made more money.

Of course, we don’t only look at wealth. A shopper is a combination of many interacting variables and that are constantly changing.

Charging everyone more would be dumb. It doesn’t even work for rush people. It’s a myth. Consider it busted!

Myth #3: “Everyone Will Play A Game To Get Lower Prices.”

Let’s take a look at the industry that re-invented dynamic pricing in the 1970’s to see what happened. Did everyone play a game to get lower prices?

We all know that airlines list the lowest price for a flight roughly two months before the travel date. It’s also common knowledge that a return flight that includes a Saturday will reduce the ticket price significantly.

How many of us book flights two months before with a Saturday stay? Some of us. Sure, we do it when it is convenient. But most of the time it isn’t. In the majority of cases we are ok with paying a higher price. It hasn’t radically altered consumer behavior.

Let’s look at 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. That would be impossible if everyone chose only the lower prices.

Everyone will play a game to get lower prices? Not in the real world. Sorry myth, you’ve been busted!

Myth #4: “There Is A Best Price Of Each Country.”

If all you’ve got is a hammer every problem starts to look like a nail.

If all you can do is set one price per country then that’s what you’ll hit people with.

The problem is that country is hardly useful at all. It’s simply the fact that the differences between people within countries is too big. For example, our sales data shows that people in San Jose, California spend twice as much as people in Los Angeles, California. Same state, same country but totally different groups of shoppers. No one would recommend you give both places the same price.

Of course, location is only one data point to look at when you are trying to understand a visitor. Shoppers come at different times of day, on different devices, with different purchasing powers, etc. The differences are endless if you think about it.

Look around at the different neighborhoods in your city. Would you consider everyone in your city the same? How about everyone in your country?

Online retailers who treat people differently – and provide the best price to each shopper – are significantly widening profit margins. The “fixed pricers” who price per country are believing myths that are bad for their business.

Bust yourselves out of your myths! Be free!

Myth #5: “Adjusting Prices Will Hurt My Brand.”

No, it won’t. We’ve been doing it for the biggest brands for years without causing harm. Why? Because fixed prices are themselves actually a myth. They don’t exist. And as consumers we seem to be fine with that.

Prices depend on context. You’ll pay between $35 and $60 for a bottle of Grey Goose at the liquor store in the afternoon. At a table at a nightclub 12 hours later you’ll pay between $500 and $1,000. Same highly branded product, same consumer, different moment = different price.

Brands stay relevant by competing in the marketplace to maximize their revenue. They don’t sit on the sidelines with dusty old myths in their heads. Brand myth busted!

To conclude, like most other industries, billing needs to evolve and adapt to the current times. Software, driven by advances in artificial intelligence, is eating the billing industry and a lot of old myths are being consumed in the process. Fixed pricing is one of them.

We started with a quote from John F. Kennedy. We’ll end with one from my uncle, a biology professor who taught the principles of evolution for over 40 years, “adapt or die.”

Thierry Arrondo is the managing director of Vendo, which develops artificial intelligence systems that allow merchants to dynamically set prices for each unique shopper.