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Analyses - September 7, 2005

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Chronology

September 2005

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Print Distribution networks, Management,

Make your pricing scheme work for you

Although business-people often tend to set the price of their products by looking at the cost and the desired profit margin, this is by no means the optimal approach to pricing because it does not take into account what each market segment is willing to pay. For Yves Cornu, a consultant with Capgemini, managers must change their attitudes towards pricing if they want to improve business profitability. Welcome to the world of dynamic pricing!

Blame it on the GDS

In the travel industry, the arrival of the GDS (global distribution systems) led to the first dynamic pricing strategies, also known as yield management, by enabling travel agencies to easily compare prices among competing companies. The advent of the internet has simply encouraged this comparison phenomenon. In an environment of virtually transparent pricing windows, dynamic pricing is even more important. Certain experts make a distinction between dynamic pricing and yield management; the former is a pricing strategy defined over the medium or long-term, while yield management uses this approach in the short-term.

Adopting dynamic pricing

An effective dynamic pricing strategy can help improve the profitability of a business. The traditional approach of many managers was to prioritize cost-cutting to increase profit margin. In today’s more open business environment, the idea of adopting a well-defined pricing strategy for one’s product has become a very interesting alternative. According to the firm of Simon Kucher & Partners, a pricing specialist, dynamic pricing can increase net profitability by anywhere from one to four percent.

With the help of technology, many hoteliers like Hilton and Intercontinental have recently adopted a much more dynamic approach to pricing. Jim Kilroy, vice-president of Starwood Hotels, feels traditional pricing models based on ceiling rates are a thing of the past and hotels should be more responsive to the market.

Before testing the waters of dynamic pricing, Xavier Marcé of XMO Consultants suggests that businesses follow the guidelines below to increase their chances of success:

  • Find out how your clients react to fluctuations in price. It’s also important to realize that demand is composed of several blocks and that it can fluctuate according to market segment, originating market, dates, etc. During certain high seasons, it is much less flexible.
  • Be familiar with what your competitors are offering. You must know who your prime competitor is before you can develop an effective price strategy. For example, the Montréal Science Centre recognizes that the Biodome offers more direct competition than an ordinary museum does.
  • Adapt your products and services to your customers’ expectations. When you are knowledgeable about your customers, you can adapt your products to specific segments. Ski areas, for example, attract retirees by offering special season passes that can only be used outside peak periods.
  • Identify demand for each period of the year. The travel industry is subject to major seasonal fluctuations in demand. Since this problem will always exist, detailed knowledge of the phenomenon’s extent, combined with dynamic pricing, can attenuate the effects.
  • Select the ideal distribution channels. While the internet has definitely encouraged an increase in direct sales to consumers, it has also created a greater number of sales channels. Online sales are a particularly flexible and responsive method of marketing one’s wares. Selecting your distribution channels also means selecting the partners who will act as intermediaries. For example, many hoteliers have regretted their decision to join forces with online agencies like Expedia that use the merchant model, because this has translated into a loss of control over the online sale of their rooms.
  • Set price barriers. By making certain prices conditional on specific situations, you can avoid losing some of your traditional customers who might be attracted to discounts. For example, offering an “early-bird” special can help counteract the effects of “last-minute” deals while maintaining less price-sensitive customers who will simply reserve later. You can also restrict the availability of products at certain prices. Finally, a method commonly used in the airline industry is to limit the options of changing or cancelling in the case of certain discount products.

Many advantages

Improving one’s pricing process is clearly more advantageous than trying to cut costs. First, it does not require a large financial outlay. Second, a new pricing strategy generates immediate results and can quickly enhance cash flow. Third, dynamic pricing usually creates a more substantial impact than simple cost-cutting.

It is also important to remember that one must never compromise product integrity. After all, for potential buyers, price is still closely related to quality and – above all – to perceived value. Consumers can be annoyed if prices are constantly being cut or products put on sale. Studies have shown that, even during a crisis, it is not profitable to drop one’s prices.

Although it may not be a science, dynamic pricing requires thought and deliberation on the part of managers so their organizations can adopt consistent strategies that reflect their corporate philosophies.

Sources:
– Boehmer, Jay. “Hotels Float Rate Change: Chains Attempt to Expand Dynamic Pricing to Corporate Travel,” Professional Pricing Society [www.pricingsociety.com], August 2, 2005.
– Brault, Franck and Sabrina Brouzes. “Le pricing dynamique, une formidable opportunité pour les tour-opérateurs,” Revue Espaces, No. 226, May 2005.
– Cornu, Yves. “Un produit n’a pas un coût, mais un prix!” Revue Espaces, No. 226, May 2005.
– Marcé, Xavier. “Les entreprises touristiques découvrent l’art du pricing,” Revue Espaces, No. 226, May 2005.
– Serlen, Bruce. “Hotel Rates Go Dynamic: Hilton, Intercontinental End Fixed Pricing,” Business Travel News [www.btnmag.com], October 18, 2004.
– Simon, Hermann and Kai Bandilla. “Maîtriser la chaîne des prix pour accroître ses profits,” Revue Espaces, No. 226, May 2005.

 

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