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As more companies across the globe become data driven and adopt analytics to improve decision making, marketers are focusing on “price” as a way to immediately improve top line revenues and profitability.
Dynamic pricing, or pricing based on supply and demand, seasonality, or other events is popular with online auctions and with many transportation companies such as airlines. However, as companies in all industries look to improve sales margins, many are realizing that a single minded focus on fixed pricing can hurt more than help.
An article in Information Age, “Liquid Commerce” May 12, 2007, details some interesting trends regarding dynamic pricing in the insurance, retail and financial services industries. According to the article, “variable pricing…has quietly taken root, aided by a combination of technologies including customer profiling and analytics, data warehousing, pricing optimization, revenue management and, recently, event processing systems.”
Companies of all sizes are using analytics to sift through mountains of supplier, point-of-sale, and other data to determine the best price to maximize sales.
One company in particular, Norwich Union, has rolled out a “pay as you drive” car insurance program. In this program, Norwich Union uses GPS, and other technologies listed above to capture, aggregate, store, analyze, price and eventually bill customers based on factors such as times of use, distance traveled, and other variables. Prices can be as low as a penny per mile!
“Young drivers are charged according to each individual journey, and the risks those journeys pose, rather than being charged one annual premium based on a demographic profile,” the article states. “For example, journeys made during the afternoon are cheaper than those made at night.”
Doesn’t this make sense, especially for young drivers who might not drive much, but generally get stuck with high premiums because of the overall risk profile of teenage drivers? The teenager that takes the car out once a week, all things being equal, should be less risky than the teenager using dad’s car every night.
Pay as you drive isn’t for everyone. The idea of a GPS installed in a car makes some privacy activists wary, and drivers who rack up high miles annually wouldn’t benefit from this plan. However, for certain customer segments, cost savings of up to 30% are available over standard premiums.
Despite my provocative post title, fixed pricing isn’t going away.
However, retailers, transportation providers, finance and insurance companies and even manufacturers are starting to realize the mountains of data they own are a virtual goldmine! The right technologies coupled with the right processes and people skills can help companies collect, analyze and act on data—to price correctly—ultimately making them much stronger in the global marketplace.
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What are your thoughts regarding “dynamic pricing”?
Do you get irritated that it’s becoming more difficult to enjoy the certainty and simplicity of a fixed price?
Do you believe that dynamic pricing will eventually overtake fixed pricing as the norm?
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Comments
Hi Paul -
Great blog and I agree with you - there's lots of opportunity to make your pricing structure more amenable to customers.
Case in point, the "pay by the mile" insurance. This pricing structure will attract new customers because Norwich's pricing structure better serves them. The next step of pricing is all about better serving the customer.
Similarly, peak/off peak pricing (at say gyms) effectively utilizes capacity and better serves customers (new customers with lower valuations may be willing to come during off-peak times in exchange for a discount, peak time users may even pay a premium to workout during peak times if the gym is less crowded).
Always happy to discuss price with you!
Posted by: Rafi Mohammed | 06.25.07
Rafi, to your point about the gym pricing, I like this quote from the Liquid Commerce article, that companies can/should use pricing to "respond to demand, create demand, to reduce waste and turn over inventory more rapidly."
It's a "P" that is definitely not past its prime.
Posted by: Paul Barsch | 06.25.07
Hi Paul,
Nice post. The concept of allowing consumers to customize products is nothing new, but it is gaining steam in some quarters. So why shouldn't services: financial, banking and insurance allow for some customization based on individual consumers' needs? As long as this can be managed properly to avoid confusion on either end--the company's or the customer's--this is worth experimenting with. If successful, it could lead to more than additional profits--it could lead to strong customer endorsements and competitive brand dominance in the marketplace, and isn't that what every company ultimately wants?
Posted by: Ted Mininni | 06.25.07
Ted, experimentation is a key element. The insurance company I profiled above did a test pilot of 5,000 drivers before they rolled out the variable pricing option to larger audiences. It's a pretty sophisticated program that will require consumer education and lots of employee training to properly explain the value propositions.
Posted by: Paul Barsch | 06.25.07
Paul,
With a program of this complexity, it makes a lot of sense to do a test run; glad to hear that Norwich Union did this before rolling it out with fanfare and then not meeting expectations. You're right: it will take time to train employees and educate customers for a program like this. However, if well executed, there could be great benefits reaped on all sides as I said before. It's going to be interesting to see whether Norwich Union's main competitors respond to this move with similar programs, won't it?
Posted by: Ted Mininni | 06.25.07
I think "pay as you drive" is a good idea. Based on the situations cited on the post, it's very reasonable and that it can't take advantage of people who don't drive often.
Posted by: John | 06.26.07
I think it's only fair to everyone for this idea to be implemented. It's unfair that people who make use of a certain service often have to pay the same with people who seldom make use of the services.
Posted by: Marie | 06.26.07
Marie, wanted to be clear I understood your comment... Are you commenting on variable pricing as a concept, or on the insurance companies "pay as you go" program?
Posted by: Paul Barsch | 06.27.07
Paul,
Read your piece with interest. Variable pricing is the way, most if not all pricing will be worked out in the future. Consumers would also happily accept to pay for what they use and certainly will be relieved to know that they don't have to pay for what they don't use.
Posted by: L Sridhar | 06.29.07
L Sridhar, there's a clear trend towards variable pricing, but with so much complexity these days, and too many consumer choices, I have to wonder if our brains will go on overload.
"It depends" pricing might drive me batty.
Posted by: Paul Barsch | 06.29.07