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How To Manage Dynamic Pricing in COVID-19


The pandemic and how it has affected business

The COVID-19 pandemic has thrown the business world off of its’ axis.  The virus has disrupted global productivity, manufacturing, service activities, and supply chains. How to manage dynamic pricing in COVID-19?

With the major services that form the backbone of the business world out of commission, how do you do business during the crisis? This is especially true if your business has begun using dynamic pricing.

In the pre-pandemic days, many e-commerce firms were using dynamic pricing models successfully.  Whether in travel, retail, or entertainment, services or products were sold online at different prices to different groups of people, often at different times.

But the pandemic has raised some legal and ethical questions over the practice, and even on the efficacy of this form of “differential pricing”.

How to Adjust your Business Strategy

This blog post shall not be going into the legal and ethical issues associated with this form of pricing during a crisis. Suffice to say that trying to maximize your short-term profits by hiking the price of some crisis products in an emergency is illegal in most countries. An example would be the sudden hike in the price of medical masks or hand sanitizers.

What we will examine in this post though are pricing and sales considerations that are before companies today following the disruptions in the demand and supply chains.

Trying to get dynamic pricing right even in the pre-COVID-19 days was a challenge for many online retailers and service providers. That was because of extreme competition. To monitor the prices of hundreds of products and measuring them against the competition required sophisticated algorithm-based software, like the one we at Express Analytics offer. With the uncertainties of COVID-19, this has got even tougher.

So, should your business discard dynamic pricing completely during this time of crisis? No. Instead, what your pricing model today must consider are the following:

  • Changes in regulations
  • Supply chain issues
  • Inventory levels
  • Real-time demand for products or services

Before we go on, here is a recap of dynamic pricing.

What Is Dynamic Pricing And How Does It Work?

Dynamic pricing tools take into account a combination of historical and real-time market data to offer price suggestions. The data can range from past performance to geography to seasons or even local events. The algorithm makes frequent changes to rates based on such data inputs, thus helping companies stay competitive at all times. Such pricing can be based on a group of people or on the passage of time.

Effectual-response Model During COVID-19

The pandemic poses a challenge to a company’s product portfolio, whether it is offering a service or a product. It’s a new, short-term market environment, and your Sales team needs to be quickly sensitized to it. However, even while catering to the short-term, Sales must not lose sight of its long-term goals; it’s like walking a tightrope.

The mantra should be, “Adapt, adapt, adapt”. The Sales team needs to adjust to today’s market conditions. Product inventory has to be modified for the same, and even the algorithm-fuelled dynamic pricing model needs to monitor and tweaked to suit the market conditions.

Here’s what a recent McKinsey report had to say on pricing in the pandemic,

“…you need to create ‘flex’ in pricing.The outperformers in today’s environment will address customers’ short-term pain points without needlessly destroying long-term value. For many, this will mean providing short-term pricing or volume relief.

“Rather than lock in long-term, highly discounted arrangements that might impact the business in the recovery, they will explore ways to bundle offerings, offer one-time promotions, flexible payment terms, credit for future purchases, or other techniques that align the offer or pricing architecture to near-term needs while providing flexibility for the future.”

KPMG issued this advisory:

In this situation, it is paramount to maintain discounting discipline to avoid the downward price spiral that happens when companies start chasing sales. Instead of reflexively cutting price, focus the customer conversation on the total value package of your product. Consider flexible terms and conditions, generous return policies, or including additional services to increase your total value proposition.

At the core of implementing flexible pricing during COVID-19 is the changing requirements of the consumer. That forces your company to re-calibrate its product portfolio. So, during the COVID-19 pandemic, you need to implement an “effectual-response” model.

Implementations of Effectual-Response Models

Here are some examples: For companies in travel, tourism, or hospitality, there was a sudden, “catastrophic” drop in short-term demand. After a few months of despair, with some aid from their respective governments, a few airlines took advantage of the “travel bubble” concept to re-start operations and have a different pricing mechanism. Travel bubbles are exclusive travel corridors set up between countries that have seen success in tackling the coronavirus.

In other sectors such as telecommunication, there was a sudden spurt in demand for services, represented by the increased data traffic, so a telco must know how to deal with this rush vis-à-vis pricing.

Here’s one way to eke out the maximum from pricing during COVID-19 — monitor real-time sales performance. With supply chains badly hit and consumers’ demands fluctuating as the pandemic unfolds, two things are of the utmost importance. These are continuous monitoring and forecasting of the daily sales performance and the supply chain pipeline. The right products or services can be prioritized, going by their daily performance across categories, points of sales, and channels, including customer feedback,

Such daily monitoring will help you build the “effectual-response model” using true market signals to identify relevant data points and avoid panic-fueled pricing to ensure that your prices are in sync with the present market conditions.

However, you also want to avoid automatic surges in product pricing because of demand mismatches. The resulting feast and famine pattern is too volatile to forecast or budget with. You need to keep a continuous eye on the market and your own pricing algorithm. Failing to do so may mean a loss of customers both in the short-term and in the long run too.

To reiterate, above all, ensure that your pricing actions are legal and ethical at all times.

Image credit: Free Range Stock/Meditations

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