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How Much? The Rise of Smart Pricing

How Much? The Rise of Smart Pricing

Smart pricing is gaining ground. However, while German consumers have long accepted smart pricing at the petrol station and in the travel industry, acceptance in other sectors is lower. But COVID-19 and resulting price fluctuations on third-party selling sites have pushed this issue again to the forefront. What is smart pricing and how should companies implement it? Who does it benefit? And finally, what challenges do companies need to overcome?

What is Smart Pricing?

Smart pricing, often known as dynamic or agile pricing, is still a relatively niche phenomenon in Germany. Smart pricing is when companies intelligently adjust their prices based on relevant supply and demand factors, often using automated technology. Consumers are used to seeing this in the travel sector, at petrol stations and on third-party seller platforms where companies can set algorithms which assess changes in demand and set prices accordingly (Amazon supposedly changes its prices 2.5 million times a day). Countries like the USA and France have also introduced Electronic-Price-Labels (EPL) which make it possible for companies to manage their prices digitally in a bricks-and-mortar retail environment.

Why Smart Pricing?

Smart pricing offers certain benefits to both company and consumer. It means that companies can calculate the best possible price according to demand, or can use pricing as a tool to establish a loyal customer base. According to price comparison site idealo, many summer products (for example garden furniture and BBQs) were more expensive this year when compared with previous summers – the reason for this may be that due to Corona consumers were all at home much more this year during the warmer months, therefore the demand for outdoor equipment was higher.  Customers only have to adjust their purchasing behaviour slightly in order to get the best possible deal and save money – a good example might be buying cheaper swimwear in winter when the weather is cold and demand is low.

Smart Pricing strategies

There are several strategies companies can adopt when implementing smart pricing:

  • Time-dependent pricing takes into account both the time of day and seasonal conditions. Online retailers also offer their products over the weekend at higher prices than during the week; even time-of-day price changes are possible.
  • Peak-load pricing means that prices rise as soon as demand increases. This is particularly useful if only a few suppliers offer the trend product in question or the product itself is in short supply.
  • Penetration pricing is strategic pricing with a view to gain market share as quickly as possible. An online merchant sets its prices below those of its competitors and, as soon as a certain share of the market is reached, gradually adjusts its prices to those of the competition.

What stands in the way of Smart Pricing?

Research suggests that society has yet to accept smart pricing in full. According to a PwC study from 2018, around 60 percent of consumers accept dynamic pricing - but not across all industries. Particularly in the food and pharmaceutical sectors, states the study, acceptance of fluctuating prices is currently still lacking.

Those consumers who are suspicious of smart pricing may also be confusing it with (the far more controversial) private pricing, whereby specific customers are asked to pay different amounts for the same product. These prices are tailored to what the retailer thinks different customers can and will spend, using personal data points that might one day include, for instance, the value of the computer the customer is using or which area they live in. Some consumers may find this manipulative while others may feel it’s fair to charge wealthy customers more for a product or service.

There is also the issue of trust. While theoretically it would be legal for a retailer to display one price for a product on the Electronic Price Label and then two minutes later change it before the customer comes to pay for the item at the cash till, at what price customer trust? This is why Mediamarkt Saturn, a retailer which sells both in store and online, does not adjust prices in store, rather only on the Internet outside of shop opening hours.

One answer to these issues is simple transparency. This does not mean companies need to disclose all calculation mechanisms, but it is important simply to inform the customer that smart pricing is in play so that they can make informed choices.

And then came COVID-19

The subject of smart pricing has become particularly relevant since the Corona crisis began because COVID-19 has disrupted supply and demand for many products and services.

There have been many cases of steep price increases on in-demand products, many as a result of automated and algorithmic responses on third-party marketplaces. This has in some cases attracted the attention of and criticism from lawmakers and the public, accusing these companies of “price gouging” in a crisis. It would therefore be advisable for companies to carefully monitor any technology-assisted pricing tools they use during times of disruption to prevent such huge price hikes seen during Corona.

In terms of general price increases during Corona, McKinsey warns companies to consider the long-term brand impact of such moves and notes that consumers will notice which companies showed empathy and which did not – and this may impact future business. However, KPMG recommends that this is also not a time to discount pricing heavily and chase sales. Instead companies would be advised to increase the total value of their proposition by including additional services, for example with flexible terms and conditions or generous return policies.

In Summary

Smart pricing brings many opportunities – and also many challenges. It is a useful way for companies to maximise their revenues, build a customer base and offers the consumer the chance to save money. However Germany is still at the beginning of this process; if acceptance and trust in society grows, there is every possibility that smart pricing could be here to stay.