By Thierry Arrondo
Special to YNOT
Dynamic pricing can generate confusion among both buyers and sellers. It’s tempting to think the model is used only to charge more to people who can afford to pay more.
That simply isn’t true. Though it may seem counterintuitive, sometimes dynamic pricing indicates charging less than a consumer can afford to pay actually makes more money in the end.
Dynamic pricing shows each shopper the price he or she is most likely to pay, based on research. For example, our data shows that lower prices cause rich people to spend more money.
Wait…what?
It turns out that offering rich people a lower price generates better conversions and higher lifetime value.
While it’s true that rich people sometimes spend more on things they buy — cars, houses, vacations, clothes, cheeses, dogs, etc. — they can be tight-asses about certain categories of merchandise. The only way to know whether rich people are tight-asses or big spenders is to test, using scientific principles like very large, randomized samples and statistically significant results.
At Vendo we have millions and millions visitors in the “rich people” category in the U.S. Over the past twelve months, we gave them low prices and high prices. We counted how much money our clients made. Simple revenue. Nothing fancy. The result? Lower prices made more money.
We can theorize and hypothesize (we do that a lot), but it doesn’t change the data. When you offer rich people a lower price, they spend more money.
So, let’s bust the myth…
Myth
“Dynamic pricing is only used to charge consumers more.”
Fact
Dynamic pricing gives customers the prices they want to pay, thereby making you more money.
Of course, no reliable study looks only at wealth. A shopper is a combination of many interacting variables that are constantly changing. Watch Clay Douglass explain the process to gain a better understanding about the kinds of things we look at and the methodology we use:
Thierry Arrondo is managing director for Vendo Services GmbH.
