Pricing Strategy And Competitive Advantage
The evolution of brand marketing moves in one direction only – toward greater complexity. Whether it’s the ever-expanding panoply of media or the rising flood of Big Data or the multiplying numbers of markets with robust middle-class consumer populations, brand marketers must manage ever more complicated markets well beyond the ken, or even the wildest dreams, of the advertising doyens depicted in AMC’s sepia-toned Mad Men.
Dynamic pricing is one of these modern-day complexities. This is pricing that varies in real-time to reflect on-going shifts in buying patterns, competitive pricing and contextual factors, and it is the coming thing in all categories. A Wall Street Journal story reported that online prices for everything from white goods to children’s clothing to consumer electronics to shoes to jewelry to detergents to razor blades are in constant flux. The highest price one minute is the lowest price the next. One online pricing software company, Mercent Corp., says it changes the prices of two million items every hour!
The Internet is the frontier of dynamic pricing, but it is found increasingly in every type of market and category. A CBS New York story reported that several high-profile New York City restaurants are now varying menu prices based on time of day or week and demand for reservations.
There is nothing new about dynamic pricing. Hotels and airlines have long done it. Airlines call it yield management. But new technologies and analytics are now bringing these practices to many other categories that have never known anything but fixed pricing (albeit, with the occasional promotion or sale to clear inventory or temporarily boost sales).
Dynamic pricing is a corollary aspect of Big Data, so it is certain to grow. But there is something deeper at work, a more fundamental force shaping the future of brand marketing.
Dynamic pricing is more than just greater complexity. It is greater sophistication about managing the brand marketing mix. There is no advantage in complexity for complexity’s sake. Brand marketing has become more complex because of greater sophistication.
The sophistication of brand marketing is driven by the degree to which competitive advantage requires advanced methods and tools. This is not to say that building competitive advantage has ever been easy. It has not. It is simply to say that today’s marketplace is much more mature and developed than ever before, so many of the things that created competitive advantage in the past are now cost-of-entry table stakes that barely get a brand in the game, much less put it ahead. Add to this the exponential growth of Big Data about markets and consumers.
Market maturity demands new analysis, and Big Data creates unprecedented opportunities for new analysis. The combination is vastly greater complexity in service of a vastly greater need for sophistication. But it is sophistication of a particular sort, one in which competitive advantage is found by exploiting inefficiencies in the marketplace.
The broader topic of inefficiency has a long, contentious history in economics, with one side arguing vociferously for the efficiency of financial markets and the other side arguing with equal gusto that money-making inefficiencies abound. There is evidence on each side, but the truth seems to be a hybrid of both opinions, a hybrid with relevance to brand marketing.
Inefficiencies in financial markets can be things like undervalued companies or more complicated things like high-frequency trading. Those who spot these inefficiencies first make millions, if not billions, thus proving the case for competitive advantage from inefficiencies. But the rush by others to follow suit quickly eradicates any inefficiency, thus proving that markets operate with efficiency. This cycle of finding one thing and exploiting it, then moving quickly to the next is true of brand marketing, too.
Every revolution in marketing is remembered for the brands that pioneered it, not the me-too brands that came flooding in next, rendering that revolution status quo and thus creating a need and opportunity for the next new thing. Over time, this pattern of an inefficiency peak followed by a flattening into business-as-usual requires ever more sophisticated innovations because the inefficiencies become harder to find. Unless brand marketers can find the next set of inefficiencies to exploit, they are stuck in a parity marketplace with ever-downward pressure on margins.
Dynamic pricing is all about exploiting inefficiencies in pricing. It turns out that there are situations in which consumers are willing to pay more, and other situations in which consumers would buy if the price were lower. With flat pricing, brand marketers can’t raise prices when such demand is present nor realize demand that can only be unlocked by lowering prices. This is a classic inefficiency, similar in concept to the advantage reaped by high-frequency traders.
But the returns on high-frequency trading are now beginning to decline and level out. Separate and apart from the threat of regulatory curbs, the growth of me-too competitors has begun to smooth out this market inefficiency. Eventually, the same thing will happen with dynamic pricing in brand marketing, just as with every marketing innovation in years past.
The key for brand marketers is to know where to look for the next competitive advantage. It is not just any innovation that comes along, but innovations that exploit inefficiencies in the marketing mix. This includes the old standbys of time, space, attention and money, as well as new things like energy, mood, social interaction, contextual nudges and delivery.
For example, Amazon is now pioneering same-day delivery, which is all about a more sophisticated way of exploiting inefficiency in the marketplace. But perhaps 3D printing will be the next step forward beyond that, yet an even more sophisticated way of exploiting inefficiencies in delivery, and perhaps even inefficiencies in customer service, warranties and product updates as well.
Bottom line, what’s important to note is that dynamic pricing is about more than pricing; it’s about inefficiencies. That’s how to look for competitive advantage in the sophisticated brand marketplace of tomorrow. Find inefficiencies, exploit them, and then move on quickly to the next.
Contributed to Branding Strategy Insider by: J. Walker Smith, Executive Chairman, The Futures Company
Sponsored By: The Brand Positioning Workshop