It's Time to Break the Pricing Paradigm

Why do companies continue to struggle with pricing? Despite an explosion of 21st century technology, including big data analytics and social media, many companies still fail to understand consumer price expectations. The business implications are significant. Retail floors are often packed with unsold inventory and sporting events are rarely filled to capacity, resulting in lost profit opportunity. Customers are bombarded with blowout sales and price promotions to the point where they've lost trust in brands and their ability to price fairly. For many merchants, price-setting is an educated guess at best, and companies are not capable of truly predicting demand at various price points. A Canadian startup called Spinzo is attempting to break this paradigm with demand-based pricing technology. It's not an easy task, but succeeding could unlock tremendous global economic value in the merchant/consumer marketplace.

A Guessing Game

Consider the process used by retailers to sell and promote products. Pricing analysts extensively review historical data to determine the optimal price point needed to clear available inventory. In most cases, the inventory does not fully sell at the list price, so a sale process begins. After a round of 20% off, 30% off, and finally 50% off, many retailers find themselves stuck with remaining inventory, which they proceed to liquidate for pennies on the dollar. Why? Retailers are failing to understand consumer price expectations for their products. To make matters worse, they enter into self-defeating cycles of discounting where customers are trained to wait for increasingly better deals, and often neglect to purchase in the end. Who wants to pay yesterday's price when a product will get discounted even more tomorrow?

Elsewhere, in a half-filled sports stadium, an executive is kicking himself at the thought of empty seats. Not only is it a complete loss of revenue on the ticketing side, but also a major blow to concession sales and the overall ambiance of the game or match. The executive ponders whether a 25% drop in ticket price could have delivered a full house, attracting all those fans who opted to watch on TV because the price was a little too high in their opinion. If this were true, ticket revenue would be 50% higher, mostly as pure profit, and concession revenue would likely be 100% higher. So why not just drop the price and fill the house? Unfortunately, with today's pricing paradigm, it is impossible to assess what the actual consumer demand is at various price points. The executive would not want to lower the price by 25% unless he or she is guaranteed a significant uplift in ticket sales.

A concept called Dynamic Pricing has been used for some time in the hotels and airline industries, but more recently, it is being employed by sports teams to optimize price point on a per-game basis by looking into factors such as the opposing team, day of the week, and game time. Companies like Qcue and Digonex are leading the way, working with dozens of teams on the pricing model. While this is a step in the right direction by leveraging more data to predict demand, it's still an educated guess on price. If you lower the price for a game ticket based on low demand, you'll have many angry fans who paid higher prices for the same experience. Before long, buying game tickets will be no different than buying airline tickets, where pricing is turbulent at best; consumers will spend countless hours on apps and portals to optimize for the lowest price, and in the process, may lose the initial excitement of attending the game.

A Lack of Trust

Customers are more value-oriented than ever, with tools and apps designed to seek out the lowest possible prices. Whether on seasonal products like snow blowers and clothing, or on time sensitive purchases like airline tickets, hotel rooms, and live events, customers are wary of paying full price. It's not necessarily due to an unwillingness to pay full price, but an expectation that blowout sales or last-minute rush promotions will eventually drive the price lower, or that a better deal can be found elsewhere. Consumers have simply lost trust in companies and their quoted "Sale" prices. To combat turbulent airline pricing, there are even tools that tell customers whether to "buy now" or to "wait", with an expectation that the price may drop further.

Despite collecting voluminous information about their customers, many companies are still disconnected on price expectations, and size is no guarantee of success, especially in the online world. Even Walmart loses online customers to the competition. Despite spending half a billion dollars on eCommerce in 2013, only 19% of Walmart shoppers use Walmart.com while 53% of them use Amazon.com, according to a recent UBS report citing Kantar Retail data. Walmart may have achieved customer trust on pricing at the brick and mortar level, but the online world is different.

With smartphone usage increasing, the line between eCommerce and in-store shopping is starting to fade, forcing the walls to crumble around the old mindset of price tags. An increasingly popular concept called "showrooming" is starting to appear, where customers enter retail stores to try out a product while simultaneously searching for the best available price online. To counter this, some retailers have enacted price-matching programs, further reducing revenue and profit predictability. Among savvy shoppers, the price tag is meaningless when they can find it cheaper online, and the trend is getting worse. According to a TNS Global study, 60% of North American shoppers engage in showrooming; over half of whom do it directly on their smartphone.

A Business Nightmare

With physical barriers coming down, companies wishing to earn trust on pricing must work smarter, not harder, and it all starts with opening up a dialogue with customers on price. Failing to do so will undermine customer relationships, and in today's hyper-connected world, could have much broader implications on brand equity. Furthermore, with hundreds of shopping options available at the swipe of a screen, companies risk losing significant revenue and profit, all because of mismanaged pricing.

If price-setting is an educated guess, then inventory management is far from science. When a retailer fails to understand the price/demand equation, it could find itself with hundreds of snow blowers left on the shop floor, just in time for a warmer-than-usual spring. Push a heavy discount to clear the excess inventory and face a thrashing on Social Media from customers who paid $200 more when it was "on sale" two weeks ago. Survive that to face an angry CFO at a loss to explain why average margin just dropped five points. Combine those challenges with increased staffing for price checks and overnight price changes, not to mention the added overhead of a consulting company engaged to sort out the pricing and inventory "issues", and you've got the ingredients for a perfect retail nightmare.

Why are we still guessing price/demand metrics in an era where brands are so "well connected" to their customers? The root of the problem is that companies are not asking consumers what they are willing to pay for products and services. What ensues is a lengthy game of price roulette where both parties lose.

A New Approach: Demand-Based Pricing

According to a Canadian startup called Spinzo, the solution to today's pricing dilemma is relatively simple: Companies should sell their products, services, or tickets, in such a way that the final price is determined by the number of committed buyers. The more interested buyers there are, the lower the price for everyone. Doing this allows the seller to pass savings on to customers only when the demand is high enough to justify it. With this approach, merchants can optimize the margin dollar equation, as opposed to guessing with margin percentages. Consumers would have access to better pricing with the peace of mind that everyone will end up paying the final promotional price based on demand. No more waiting on the sidelines for an item to go further on sale.

Spinzo has built a web-based platform that allows any business to run time-limited, demand-based pricing promotions on a turn-key basis. The merchant can set an initial price, various price/quantity parings, and a final floor price. As a default, the platform is completely hosted by Spinzo and white labeled to assume the branding of any company. Promotions can go live in minutes.

Whenever a customer joins a Spinzo-powered promotion, they drop the current price instantly then ride the price downward as more customers continue to join. Alternatively, customers have the option to pick their maximum purchase price among a set of pre-determined levels set by the merchant. If the final price drops below their choice, they will be part of the sale. All orders are binding, by way of credit card authorization, and products can be redeemed in numerous ways, including serialized barcodes (for in-store pickup or venue ticketing), or direct shipment (for eCommerce).

Viral Promotions: The Holy Grail of Marketing

The term "viral" is overused in social media marketing, and the experts say that you can't make something go viral; you can only ensure that the ingredients are in place to make it happen. Spinzo contends that the right promotions with the right price curve can go viral based on the idea that participants have a strong incentive to spread the word: a lower price. Unlike other promotional schemes where a user may have to share a unique link to numerous friends before they get a benefit themselves, Spinzo gets down to basics. "It doesn't matter how a customer spreads the word: at a coffee shop, at the office, over the telephone, or on social media," says Emmanuel Elmajian, Founder and CEO of Spinzo. "All purchasers benefit from everyone's participation. Brands can make a very powerful promise to their customers: the more people who buy, the lower the price for everyone."

To fuel the viral appeal, Spinzo-powered promotions feature a live price meter allowing customers to keep checking the current price. On every visit to the promotion page, customers have more opportunities to share via email or social media. Additionally, brands can initiate automated emails to customers who are already participants in a promotion, informing them of the current price, and that it could get even better with more participants. "It's a great way to keep customers engaged in the sale process," says Elmajian. "You're mobilizing your best customers to become your best ambassadors."

A New Use Case for Social Media

Many brands continue to struggle with social media and how to best engage their followers. The flavor- of-the-day best practice states that companies should be building creative content related to their area of business, but not so direct that customers view it as advertising. That's a tough line to balance, and if done successfully, only gives brands half of the marketing pie: strategic marketing. A marketing department is typically tasked with both strategic and tactical marketing, so the question remains: how should companies leverage Social Media to engage in tactical marketing? Demand-based pricing promotions offer a compelling solution because they engage customers in a fun and creative way while promoting the sale of products or services.

Consider a sports team that has some seats to fill a week before the game. In an effort to better engage fans on social media and fill the venue, they could offer a special package that includes the game ticket plus an autographed player photo of last week's star. Social media is the perfect place to quickly spin up a promotion of this sort where the greater the take up of the offer, the lower the price for everyone. The team can even set a threshold to create the sense of urgency (e.g., only 200 available). Followers will appreciate that they get a first crack at the unique falling-price offer, and if promoted tastefully, with info, stats, and video of the star player, it will not seem like a blatant advertisement.

Black Friday Without the Black Eye

Love it or hate it, Black Friday is an integral part of a retailer's sales strategy. It's the Friday of the US Thanksgiving Holiday and most noted for a limited number of "door crasher" sales among retailers large and small. Over the years, it has become better known for overenthusiastic customers jostling each other for a half-price TV. Staff must be paid overtime, sufficient inventory must be purchased, and security must be increased. Negative press ensues with customer getting injured in the fray, fights over limited stock of high-demand items, and bad customer service.

Demand-based pricing promotions, offered online, can recreate the positive aspects of Black Friday without the black eye suffered by retailers and customers alike. Retailers can promote a set of "12 Hour Live Price Drop Deals" where customers participate from the comfort of their own homes, or on their smartphones. It has the urgency required to create buzz without the risk of a physical mad-dash to isle 23. Throughout a 12-hour period, the price of a product will drop as more people opt into the promotion. Since everyone is paying the same final low price, this style of promotion has the potential to spread through social media like a wildfire. It relieves inventory risk, provides a more consistent experience with centralized customer service, and has the potential to involve a number of people exponentially larger than can fit inside a physical store.

With Spinzo's platform, retailers can create mini Black Friday promotions of their own throughout the year. It's a great way to bridge the gap between the online and in-store experience while keeping promotion costs at a minimum. Products can be direct-shipped to customers or picked up in store during a designated timeframe.

Dynamic Pricing 2.0: Demand-Based Pricing

Demand-based pricing takes the concept of dynamic pricing to the next level of maturity. With the current dynamic pricing model, price is customized to reflect a predicted level of demand for a particular game, concert, or flight. If the prediction is not accurate, the seller suffers the same consequences of not having used dynamic pricing: either empty seats or a full house at a price that was too low. With demand-based pricing, an initial prediction can still be made, but the final price is flexible to permit the filling of a fixed-capacity space if it makes business sense at a lower price.

Consider a hockey team that, after careful analysis, decides to price central upper bowl tickets for a rivalry game at $80. Two problems may occur. Either the tickets won't sell to capacity, resulting in lost revenue potential, or the tickets sell out instantly, again resulting in lost revenue potential due to the under-priced tickets. Demand-based pricing prevents both from occurring. In the same scenario, Spinzo would advise its clients to start the ticket price at $100 with a price curve that slides it down to $85 on full capacity. If demand is high, the tickets will sell out at $85 and the team will have earned more revenue. If the demand is low and nowhere near capacity, the team can lower the price for guaranteed volume levels. For example, they could price tickets at $70 for full capacity if it means generating more revenue.

"Teams no longer need to predict demand. They can shoot for the moon on pricing, and in the worst case, they will land among the stars," says Elmajian, referring to a popular quote from Norman Vincent Peale. All of this happens while maintaining the hearts and minds of fans; everyone pays the same price for the same experience. No more buyers remorse caused by a last minute half-price rush.

An Efficient Global Marketplace

At its core, demand-based pricing is no different than volume-based pricing, used since the beginning of modern money. Technology has advanced the age-old concept of trade, enabling marketplaces to better transact through binding orders and the elimination of physical barriers. Combined with modern media and the Internet, this transformation spawned eCommerce as a new sales medium in the past two decades. Now, with modern marketing and social media, the wheels of innovation are at work again, with companies like Spinzo doing its part to further improve efficiency in the global marketplace.

Demand-based pricing is one of many innovations in the pricing world. It is an integral piece of the puzzle for companies wishing to operate smarter, not harder, in creating a pricing relationship with consumers that is fair and engaging, while maximizing bottom line profit. The result is an efficient marketplace built on trust and dialogue on the concept central to all commercial trade: price.