December 20, 2012

Dynamic pricing: Why online retailers’ new pricing strategy will backfire


From a pricing perspective, there are a variety of reasons why retailers are employing dynamic pricing. And while changing prices may reap short term riches, this practice can destroy long term profits, writes Harvard Business Review.

It's emerged as this season's hot holiday pricing strategy for online retailers such as Amazon and Best Buy: dynamic pricing. That's the strategy, employed by industries such as airlines, in which a seller moves prices up and down quickly, charging similar customers different prices for the same product or service. What's surprised me is how extreme these price fluctuations have been. During Thanksgiving week, for instance, The New York Times tracked the price of Dance Central 3, a popular Xbox game, as it dropped from $49.96 to $24.99 to $15. While such a drastic price change is atypical, I've found 15% - 25% price swings to be more common.

From a pricing perspective, there are a variety of reasons why retailers are employing dynamic pricing. And while changing prices may reap short term riches, this practice can destroy long term profits. Retailers need to understand that how they set prices is a key component of their brand ‘ and any changes can adversely affect both their brand as well as how consumers shop.

It's a lesson Apple learned painfully. In September 2007, just 68 days after introducing the iPhone, Apple dropped its price from $599 to $399. Consumers who purchased early were livid about this quick discount. Apple gracefully handled this debacle by apologizing and offering a $100 credit for Apple products. Netflix hasn't fared so well in handling a similar uproar. In July 2011, Netflix announced a significant price increase that incensed consumers. Netflix remained tone deaf to the mounting rage and as a result, within three months of this price change, its stock had dropped from $271 to $75.

Get the full story at Harvard Business Review