Dynamic Pricing From A to Z

Dynamic Pricing From A to Z 1

The Future

Imagine that a bride is looking for a team of vendors for her big day. She provides the date of her wedding day, the number of guests and other pertinent information and within minutes she receives 100 quotes and hires her vendors.

Whether you are a wedding photographer, videographer, makeup artist, planner, officiant or DJ, chances are you are using dynamic pricing at times. Very often your prices for the peak season are higher than those you charge during the slow season. That is, in fact, a basic form of dynamic pricing.

What is Dynamic Pricing

Dynamic pricing is a system whereby quotes are determined based on a series of variables such as percentage of inventory utilized, number of days until the wedding day, competitor prices and so on. This type of pricing is already employed by airlines, hotels, car rental companies, the advertising industry, concerts venues and so on.

Even law firms, TV stations and other companies that deal with perishable inventories are looking to implement’s dynamic pricing.

Common Pricing Strategies

Among the most common pricing strategies we can list the cost-plus method, the value-based pricing method, follow the competitor’s pricing method.

As we saw in another article on dynamic pricing for wedding photographers this tactic can increase revenues by 30%. In a competitive arena such as the wedding industry a 30% increase is not a small feat.

Price Lists vs. Price Algorithms

Price Lists

The most basic form of dynamic pricing (DP) is using two or three sets of quotes for various times of the year depending on demand levels.

For example, a wedding planner can use three pricing tiers: winter prices (the lowest tier) , summer prices ( the highest tier) and rest of the year prices (mid tier).

Here, our wedding planner simply posts this three price lists on her website so that couples know how much she charges depending on their wedding date.

Discovery Algorithms

A more sophisticated method consists in employing algorithms to determine the fees for the service depending on a set of variables.

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Let’s suppose a New York wedding photographer wants to shoot 50 weddings a year. The lowest price he is willing to accept is $3000 while his ideal price is $6000. We will call the start of the pricing interval ($3000) a floor pricing as our photographer will not shoot any weddings below this price point. His dream price, $6000 is called the ceiling price.

A relatively simple way to calculate the price at any moment in time would be to link the fees to the number of weddings already booked.

We divide the pricing interval by the number of weddings per year to determine the incremental price that should be charged after each wedding is booked. Incremental Price = ($6,000-$3,000)/50=$60. In other words, our New York wedding photographer should raise his price by $60 every time he books a wedding for that year. Here is how is prices would look like:

Wedding 1 @$3,000

Wedding 2 @ $3,060

Wedding 3 @ $3,120

Wedding 4 @ $3,180

Wedding N @ $3,000 + (N-1) x $60

Where 1<=N<=50. In other words N the number of wedding is anywhere between 1 and 50.

This method is called discovery pricing because the couples don’t know in advance how much they will pay. Implementing the algorithm requires a more sophisticated website and a continuous communication between the inventory database and the pricing webpage.

While the implementation of such website might seem difficult, it isn’t. Also, this algorithm allows or wedding photographer to capture an extra $73,500/year compared to using the average price of $3000 per wedding.

As you can see, the return on investment is obvious and or professional will recuperate the investment in the first 1-2 years.

Not Only Wedding Photography

While were talking about the wedding photography industry, these models can be applied By many other vendors: venues, bakers, officiant’s, limousine companies, planners and so on.

Other Advantages of this Approach

We saw that DP generates an incremental revenue of almost 50% compared to the average pricing method.

Another very important advantage of DP algorithm is the fact that customers feel the urgency to book early, which gives our vendors clarity over the future stream of cash flows. The brides who want to book last-minute are “penalized” by paying a higher price. As such, over time, the market will be educated to book early.

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Dutch Auctions

The Dutch auctions also known as reverse auctions are also a form of DP where they collectively vendors bids for a couple’s business. It goes like this:

1) The couple post their budget for a wedding photographer say $3,000

2) All the wedding photographers are notified and bid prices lower than $3000

3) After several rounds of bidding (ideally 1-3 rounds), the finalists are selected and the bride decide who her photographer is based on stylistic and personality preferences

This is a very democratic and transparent process which is fair for both the couples and for the wedding vendors. Similar systems are employed by car rentals, airlines, hotels we use side channels (Expedia, Kayak, Travelocity, etc.) to sell their inventory.

The advantage of such system is that a professional wants to book more weddings can offer a temporary lower price without damaging her brand. Here is an and interesting article about the risks of price drops.

Situations Where We Can Use DP

There are several situations when we can employ DP.

1) when the market is large enough so that no vendor enjoys pricing power. in such cases the market is so fragmented that no particular company owns a significant market share. These situations are more common in large metropolitan areas such as New York City, Los Angeles, Toronto, Shanghai, Beijing, Paris, London, etc.

2) the services have a limited shelf life or in other words the inventories are perishable. That is the case for example for wedding photographers who lose that weekday if they don’t book a wedding.

3) the fees charged have little relation to the cost of producing the service or good. Again, in case of the videographer or photographer, their packages are not based on the direct costs of producing the photos or films.

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4) there is a need for a stable cash flow. the wedding industry is well known for fluctuations of the cash flows. In the summer (peak season), most of vendors enjoy a bonded influxes of money while in the winter the cash flows dry up. By employing DP and a installment program, vendors cannot only help couples with their payments but also can flatten the cash flow curbe.

Paradigm Shift

The danger of such system is that we need to educate our clients and change the paradigm from price per photos, packages, charges per hours of coverage to a more fluid pricing environment.

The advantage for the couples is that they can build their own package depending on what they value as opposed to what the vendors want to sell.

Dangers of Dynamic Pricing

While the airlines, hotels, car rental companies have been using dynamic pricing for a while, the wedding industry needs to be educated in this matter.

Clients can perceive DP as inequitable, which can damage your brand for good.

Using DP, especially the discovery algorithm can be perceived as a lack of transparency and an attempt to rip off the clients. A good place to start would be posting price lists (pricing tiers) for the peak, low, and shoulder seasons.

When using a marketplace to sell inventory quickly, the professional needs to be able to justify the price point differences across channels. For example, brides can ask why the packages on the website are different from the ones listed on the marketplace website.

Thank You!

We would like to acknowledge and thank Calin, an MBA pricing professional turned into a wedding photographer for his contribution to this article. To enjoy his work, please visit www.bycalin.com

References

How to Reap Higher Profits With Dynamic Pricing, MIT Sloan Management Review, Summer 2007

Videos

Here are a few videos that will provide a deeper understanding of DP.

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