Dynamic pricing: Common myths dispelled

The UK is in the midst of an inflation crisis: with rates soaring, inflation is forecast to hit 8% by April 2022 according to economists. Due to a combination of factors, including the fallout from Covid, Brexit and supply chain disruptions, companies are experiencing a dramatic rise in their input costs, due to the price of transport and materials alike rising. Rather than just affecting consumer companies, B2B organisations are also feeling the hit. For all businesses, profit margins are at real risk of being eroded very quickly.

In this context, businesses have no choice but to adjust pricing with a dynamic and flexible approach. When there is such extreme fluctuation in the market, companies cannot keep prices the same without either squeezing the customer or sacrificing margins. At the same time, manually adjusting prices in reaction to every fluctuation, amounting to multiple times a month, is time-consuming and also inaccurate.

Enter dynamic pricing

Dynamic pricing is the process by which businesses establish flexible prices for products or services in order to adapt to real-time market conditions and other relevant factors.

Artificial Intelligence (AI) can be leveraged in this pricing approach to empower businesses to adapt quickly and dynamically to changing market circumstances. AI-driven technologies can help companies price products at a point to best satisfy the customer, by analysing in real-time data points around market dynamics, customer willingness-to-pay, product availability and more factors. Market-leading AI and dynamic price change calculations should be combined with the ability to manage impact across all customer agreements.

However, there are some common myths around dynamic pricing that have previously discouraged businesses from implementing this approach.

Myth #1 – ‘Price gouging’

It has been wrongly assumed that implementing flexible and dynamic pricing to adapt to market conditions benefits the business at the cost to the customer, amounting to ‘price gouging’: when the seller increases the prices of goods, services, or commodities to a level much higher than is considered reasonable or fair.

In reality, robust dynamic pricing strategies have guardrails to ensure that pricing is market-relevant and does not fluctuate dramatically without reasonable cause. Rather than confusing and alienating customers with unreasonable prices, dynamic pricing actually utilises complex and intelligent data analysis of buyer behaviour to set price points that customers are happy to purchase at, whilst keeping prices fair and relevant to wider conditions.

Myth #2 – B2B suitability

For B2B businesses, pricing often remains an afterthought, rather than a key factor which influences growth and success. In these cases, businesses likely assume that dynamic pricing is not in their realm, and risks eroding yield.

However, dynamic pricing has already been widely used and accepted in many B2B industries which have long suffered from volatility, such as the oil and gas or chemical industry. The pricing approach reflects market conditions at a certain point in time, removing the need for unnecessary reactive discounting or maximising peaks. As a result, yields are not eroded.

Rather than being a risky and novel concept, dynamic pricing is a well-established approach which businesses would be wise to adopt to deal with current market turbulence.

Myth #3 – Customers will be scared away

In part due to the above misconceptions, some businesses fear dynamic pricing capabilities scaring customers away. However, in reality, the opposite is true.

Increasingly savvy customers are demanding sales processes to be as customised and efficient as possible. Adopting AI-driven approaches enables businesses to provide this, as well as accelerating the sales cycle to their own benefit too.  In contrast to fearing this pricing system, customers benefit from the seamless and personalised process.

Whilst there is a degree of risk for all pricing strategies, this process offers risk sharing that is mutually beneficial, rather than locking in a long-term price and having to estimate future markets, a situation in which inevitably only one party wins, rather than both. 

Myth #4 – Necessity of perfect time and data

This final myth assumes that in order for dynamic pricing to be successful, the process requires years of historical data combined with years of time and resources to implement. The seeming immensity of the task is off-putting for many.

In reality, dynamic pricing does not require a large-scale digital transformation project at all because technologies such as smart price optimisation and management software do the work in empowering businesses to price products quickly and accurately.

Risks of traditional pricing

Conversely to what the above myths would indicate, it is traditional pricing processes that actually hold more risk for B2B sellers, and that ultimately prohibit them from being competitive in the market.

Often when pricing is conducted through traditional systems, knowledge ends up being siloed in a few experienced individuals, leading to bottlenecks when it comes to providing customer quotes. Manual pricing also results in a disconnect between systems. A lack of visibility over various factors, from performance to profitability, makes it hard to optimise pricing, and will result in inconsistent pricing techniques in the long-term.

Legacy systems do not hold value in merely their legacy status. Pre-Covid systems are often not fast or flexible enough for the adapted and evolved economic environment. It is crucial that businesses can adapt quickly in crises, and pricing cannot be ignored as a key element of this.

By giving sellers confidence that they’re not underselling or overselling customers, but are in fact maximising value, sales teams have the confidence to execute key deals that impact the bottom line.