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Dynamic Pricing

Wendy’s announcement that it would “test” dynamic pricing drew immediate fire from critics who viewed it as a money-grab. Some members of the business press described it as “Uber-like” surge pricing.

The fast-food chain received notable vitriol from the public, but much of this was a result of poor messaging. Wendy’s lost control of a narrative that could have been about providing more value at off-peak times. A more thoughtful examination of dynamic pricing reveals a flipside.

Dynamic pricing has been omnipresent in our economy for some time. From airlines to hotels to Airbnb, many businesses adjust pricing based on supply and demand. Why is it above board for a utility provider to adjust pricing based on supply, but so controversial for fast food? Certainly high food prices have something to do with it, but dynamic pricing has been a shock to the senses.

Our economy operates on the premise that a good’s price is determined by its level of scarcity or abundance. Dynamic pricing smooths out variances in supply and demand in a way that serves both providers and their customers.

By adopting dynamic pricing, providers can:

Conduct more meaningful testing to offer customers the best range of choices. A/B tests reveal what items people prefer in terms of size, flavor, color, price, etc. Today’s analytics enable evaluation of such options faster. Say an ecommerce provider offers 1,000 SKUs (stock keeping units) of bar soap. If it were unable to lower prices on the worst movers, it would have to reduce the number of SKUs it offers.

Increase in-stocks. By better managing inventory, providers can improve their in-stock condition and expedite orders of the raw materials they need.

Optimize labor. Employers can coordinate labor supply based on labor demand. Arguably, this could allow employers to utilize labor more efficiently and reduce overtime.

Optimize inventory and reduce waste. Systems void of adjustment to supply and demand are wasteful, in that providers must carry too much raw material of finished goods inventory that they may need to ultimately throw away. This is especially true for food, which is perishable.

Be more sustainable. Minimizing the number of trips customers make or the time they wait in line can reduce consumption of fuel, or even the amount of paper being used to print menus.

Shift quickly to adopt different strategies. Some providers may demand a premium product for a good, when others prefer to achieve higher penetration. Dynamic pricing enables providers to change their strategies rapidly.

Optimize margin on scarce items. While some critics don’t see it as fair, not every item is created equally. If 10,000 concert seats are sold, the last ticket does not have the same value as the first ticket sold. If a fast-food retailer offered St. Patrick’s Day milkshakes with green ice cream and only had one scoop left, it could raise the price of the scarce item, making it available to a person who values it most while discouraging people who are willing to buy another flavor.

Encourage more product development. Higher prices embolden providers to create products they would not otherwise produce or sell.

In the wake of supply chain shocks and higher inflation, companies must be resilient if they are going to stand the test of time. Dynamic pricing actually makes business sense, but will require that marketers control the narrative and recondition their customers. The days of the annual price increase letter are over.

Employer of Choice Study

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Want to gain insight on how to be competitive in the current war for talent? Our upcoming study will contrast the perceptions of employers and employees. Take a brief employer survey, and we will provide you the results of our study, which will uncover why employees are likely to leave, and why they are likely to stay.

Interest Rates and Stagflation

It’s time for reality to set in. Much of our current calculus, including business owner confidence and the stock market, is shaped by expectations of lower rates this year. But hopes for several cuts in 2024 are waning.

As we pointed out in our January trends webinar, we are likely in a long-term debt cycle exacerbated by stagflation. There is mounting evidence that the Fed will not cut rates anytime soon.

The February jobs report came in at +275,000 jobs—stronger than expected. While inflation is much lower than last year, it’s still well above the 2% target. While 3% may not seem much higher than 2%, the 50% delta is material. From returns on insurance products to retiree distributions, many financial assumptions are tethered to the 2% rate. There are calls for adjusting the Fed’s “dual mandate.”

Come fall, the Fed will be under pressure by both political parties, who will use interest rates as a political football headed into the election.

If you buy a product online, every conceivable variable on the page is tested, including the images, order, pricing, description, and discounts. Today’s technology enables rapid A/B testing of these variables. But for some reason, B2B marketers resist testing their products.

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Video: Optimize Market Research

The Strategy Experts

Marc Emmer is President and Chief Strategist & Facilitator at Optimize Inc. He is an author, speaker and consultant recognized as a thought leader throughout North America as an expert in strategic planning.