MKT 034: Pricing Strategy

Module #11 Student Activity Sheet

Lesson title: Price Level: Dynamic Pricing Material: SAS

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Learning Targets:

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At the end of the module, students will be able to: Reference:
1. Explain Dynamic Pricing

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Nagle & Muller (2018). The Strategy and

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2. Simulate implementation of Dynamic Pricing Tactics of Pricing.

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Productivity Tip:

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“If you have time to whine then you have time to find a solution.” – Dee Dee Artner

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A. LESSON PREVIEW/REVIEW

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Introduction
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Let us continue. Dynamic is defined as a process characterized by constant change, activity
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(Google.com) and our lesson for today is about Dynamic Pricing. Let us see how dynamism is being
implemented through pricing.
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B.MAIN LESSON

Content and Skill-Building

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Topic #1 Dynamic Pricing

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Whenever pricing strategy becomes worthy of a drunken rant; you know it is a big deal -- and a great
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opportunity to explore a concept that can boost revenue.

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Yet, over the past few years companies utilizing dynamic pricing have come under fire from consumers.
While the push for fatter margins through pricing is admirable, these implementations fell short of a few tests to
ensure customers and the business were ready for such a dynamic and variable step.

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 MKT 034: Pricing Strategy
Module #11 Student Activity Sheet

To ensure you do not make the same mistake(s), let us take a dive into what exactly constitutes
dynamic pricing, review some pros and cons, and then present some ways to make your pricing dynamic -

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without the backlash.

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What is dynamic pricing?

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At its core, the dynamic pricing model is the concept of selling the same product at different prices to
different groups of people. Technically, this is the same definition as “price discrimination”.

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.

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As a result, business have taken it upon themselves to institute dynamic pricing in two forms:
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1. Dynamic pricing based on groups

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In this scenario, companies are using machine learning algorithms or just statistical splicing to offer
different prices to different groups. This can be as simple as a split A/B test or more sophisticated by
predicting a higher willingness to pay based on machine type, location, demographic information, etc and
showing a different price to a particular group.

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 MKT 034: Pricing Strategy
Module #11 Student Activity Sheet

2. Dynamic pricing based on time

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Somebody was complaining about this form of dynamic pricing - having a price go up or down based
on time. In its most basic form you will see this purely in a car lot - at the end of the month prices are lower as

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salespeople push for quotas. In a highly sophisticated method, individuals will use something to make these
decisions on the fly to maximize revenue for events and meet different levels of demand.

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Is dynamic pricing fair?
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In its purest form, we all should theoretically be perfectly ok with dynamic pricing, because we, the
consumers, ultimately have a decision of whether we are going to purchase the product or not. The onus is on
the producer to make sure the price presented meets our willingness to pay to ensure a purchase -- aligning to
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our own personal equilibrium price with real-time pricing. If you are not willing to pay for the product, you will
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leave and maybe come back when there is a sale or a cheaper version. If you are willing to pay for the product,
then your utility is met and you are none the wiser about your friend getting a cheaper price. Its perfect pricing
and harmony in the free market.
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Unfortunately, like most economic theories, reality is a bit more complicated. When blatant dynamic
pricing is revealed to a consumer, it appears more like price discrimination than the fluffy world illustrated
above, because we feel like we were just lied to and that we did not get as good of a deal as someone else..

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 MKT 034: Pricing Strategy
Module #11 Student Activity Sheet

This is not a huge deal if your customer never finds out or you are in a “dynamic industry” - travel,

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tickets, etc. Most dynamic pricing engines out there do not get enough real-time data to truly differentiate. Even
then, tracking technology has not gotten to the point where we can ensure that an individual who received a

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price on Tuesday gets the same price on Friday or even shows the same price to their business or family
member in a different time zone. The result means that if you have a product where the sales cycle is more

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than 24 hours or involves multiple people, the risk that the secret gets out increases exponentially with each

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day an individual is involved in the buying process.

How to implement dynamic pricing

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This does not mean you cannot institute some aspects of dynamic pricing successfully. After all, not all
of your customers are the same, therefore you should be able to extract more revenue from some than others.

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You just need to implement them in the proper manner:

1. Price Differentiation - Two prices are better than one

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One of the bedrock concepts in pricing strategy is to quantify your customer personas and then align
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your packaging and pricing to those personas. Typically, you will find your personas are not all created equal,
and if you do, then you probably are not thinking about your personas properly. You can then offer lower and
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higher prices on different versions of your product to bring in dynamic revenue from customers of different
sizes.
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2. Ensure you are using a proper value metric

Hand in hand with price differentiation is pricing along a value metric, which is what you are physically
charging for in terms of a product (per user, per GB, etc.). This is difficult for a retail product, because you are
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charging for a physical item, but in the software world, you can split your pricing up based on number of users,
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amount of storage, number of views, etc. or a combination of multiple metrics. The impact here is every
customer is paying you a different among - accounting for dynamism and less cash being left on the table.
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3. Utilize Time in an auction type model

Similar to what many sports teams and concerts are doing with ticket prices, you can make sure your
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price goes up or down based on time. Airlines and travel booking sites do this all the time. There is no reason
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someone launching a software beta or releasing a new widget cannot use dynamism in their pricing.

4. Couponing and Discounts

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We are not a huge fan of discounts, because of their negative impact on future sales and your brand,
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but they can be used effectively in discretely providing a dynamic price to a subset of prospects or customers.
Keep in mind that with social products you will want to ensure the coupon does not spread, but this is typically
less likely compared to a public site having different prices and is more socially acceptable.

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 MKT 034: Pricing Strategy
Module #11 Student Activity Sheet

5. Be upfront and transparent

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Most proponents of dynamic pricing say you should just be transparent that you are employing dynamic
pricing on your site. This is great, but it still does not solve for the cognitive dissonance of, “am I truly getting

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the right deal?”

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You will notice that all of the above suggestions solve for both being transparent and eliminating the

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feeling of missing out. That being said, although you probably won’t get into legal trouble with dynamic pricing,
you need to be careful about your brand, image, and any PR backlash that can leave a long lasting impact. We
have found price transparency is key and will definitely continue to advocate for more, rather than less.

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Check for Understanding

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Encircle the letter of your choice.

1. Most lawsuits and _____involves this form of dynamic pricing (although, few of these lawsuits have been

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won by consumers). M
a. Consumer repercussion
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b. Consumer counterattack
c. Consumer backlash
d. Consumer counter attack
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2. Dynamic pricing based on time, my subway friend was complaining about this form of dynamic pricing -
having a price go up or down_____.
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a. Based on time
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b. Based on interval
c. Based on phase
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d. Based on period
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3. In its most basic form you’ll see this purely in a car lot - at the end of the month prices are lower as
salespeople_____.
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a. Push for allocations

b. Push for allowances
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c. Push for proportions

d. Push for quotas
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 MKT 034: Pricing Strategy
Module #11 Student Activity Sheet

4. In a highly sophisticated method, individuals will use something to make these decisions on the fly to

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_____for events and meet different levels of demand.

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a. Maximize income
b. Maximize revenue

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c. Maximize profits

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d. Maximize returns

5. Is dynamic pricing fair? In its purest form, we all should theoretically be perfectly ok with dynamic pricing,

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because we, the consumers, ultimately have a _____of whether we’re going to purchase the product or not.

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a. Choice

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b. Judgment
c. Assessment
d. Decision

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C. LESSON WRAP-UP
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Summary
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The dynamic pricing model is the concept of selling the same product at different prices to different
groups of people and we all should theoretically be perfectly ok with dynamic pricing, because we, the
consumers, ultimately have a decision of whether we are going to purchase the product or not.
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If you are not willing to pay for the product, you will leave. If you are willing to pay for the product, then
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your utility is met. Its perfect pricing and harmony in the free market.
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Thinking about Learning

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Congratulations for finishing this module! Shade the number of the module that you finished.
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Did you have challenges learning the concepts in this module? If none, which parts of the module helped you
learn the concepts?
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 MKT 034: Pricing Strategy
Module #11 Student Activity Sheet

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Some question/s I want to ask my teacher about this module is/are:

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Answer Key

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