Dynamic Pricing: Should Brands and Manufacturers Use it Too?
Many brands and manufacturers are developing the direct-to-consumer retail channel. Most do so via their own e-shop. As a result, they are faced with the same options as retailers. One of these questions is: should they use e-commerce dynamic pricing?
Why do brands develop the direct-to-consumer channel?
Let’s start with a little bit of context. There is a variety of reasons for brands to develop their direct sales.
First of all, direct sales is the distribution channel that they can best control. That’s because it is much easier to nail your online merchandising on a website that you control. Read our complete e-commerce merchandising guide for more on this topic. When your products are displayed and sold on a brand’s website, that’s where they shine most. As a result, you can offer the best customer experience.
Another reason is to own the consumer data. It is not uncommon for retailers to provide sales data. But the data presented is often patchy at best, and hard to add up between retailers. Furthermore, obtaining more detailed data (average sale price, basket items, buyers demographics…) can be impossible or expensive. By selling on their webshops, brands collect as much data as they want. Nespresso, for instance, chose to only sell capsules directly. This allows them to conduct in-depth consumer behavior analysis and reduce consumer churn.
The last reason is to build a lasting relationship with the customer. By selling directly, a brand becomes the customers’ interlocutor. It can add them to their CRM, marketing campaigns and cross-sell efforts. It can provide support and maintenance for their products. Also, it has a higher chance of turning consumers into fans and promoters.
The importance of dynamic pricing
By engaging in retailer-like activities, brands are quickly faced with retailer-specific questions. In particular, the question of dynamic pricing strategies has become a cornerstone issue for retailers.
Amazon is the undisputed king of dynamic pricing (at least in the retail industry). Its ability to adjust millions of prices at a very high frequency is unparalleled. Amazon uses a variety of pricing techniques:
- Price matching: this one is the most used and most advertised by Amazon. For each market and each product, Amazon will define a set of influential retailers. It will watch their prices at high frequency and match any price drops.
- Surge pricing: Amazon is able to detect moments of increased demand for a product. This can be reactive (a TV channel is mentioning the product) or predictive (this product sells more in the evening).
- Perception pricing: offering the lowest prices on flagship products while marking up other products. This Business Insider piece highlights how Amazon might have discounted a popular Samsung TV while jacking up the price of an associated HDMI cable.
Dynamic pricing allows retailers to win sales over their competitors. It also helps them more closely match their customers demand and the willingness to pay.
Brands tend to be sensitive when it comes to dynamic pricing. Most of them develop products with an MSRP in mind. In an ideal world, they would like all retailers to permanently list their products at or above the MSRP. That is because the listed price has a strong influence on margins and perceived value.
As a consequence, one can easily imagine that brands are reluctant to encourage price fluctuations and permanent discounts. Yet there is a strong case for them to implement some degrees of dynamic pricing.
The case for brands and manufacturers to start using dynamic pricing
In an ideal world, retailers would not compete for the best price. They would never have to discount items. Prices would forever stay at the MSRP. Brands and manufacturers could have copy-perfect, fixed-price e-shops that look like catalogs. Prices would remain the same throughout the lifecycle.
In the real world though, intra-brand competition is almost inevitable. Retailers order too many units and have to discount them. And prices fluctuate, sometimes way below the MSRP.
Brands are faced with a choice: do they maintain their prices at MSRP-levels and turn their webshops into low-selling online catalogs? Or should they set up some degrees of price management to stay relevant?
There is no good answer to this question. It is every manufacturer’s choice to make. More of them choose to desacralize the MSRP for some of their products. This comes with the following advantages:
- More direct sales with the associated benefits (see above)
- An increase in price consistency across most retailers
- The opportunity to become a price leader and define a new price consensus.
Here is an example with an imaginary company, HeadphoneCorp:
- HeadphoneCorp is selling the Headphone One, its first product, at $199
- It then ships an updated version, Headphone Two, also at $199
- Of course, customers stop buying the remaining units of the inferior Headphone One
- Retailers begin to heavily discount the Headphone One, damaging the brand.
In this case, HeadphoneCorp could react by setting the price of the Headphone One to $149 on their own e-shop. While acknowledging the loss in value of its former product, it is also establishing a new reference price for all retailers.