Dynamic Pricing and Customer Trust: 4 Tips on How to Achieve Both

Dynamic Pricing and Customer Trust: 4 Tips on How to Achieve Both
January 1, 2016 Revionics

Trust (trəstfirm belief in the reliability, truth, ability, or strength of someone or something

For retailers, maintaining customer trust that their merchandising practices are fair and transparent is essential to long-term success. As a consumer, you know instinctively that this is true. If you take just one brief moment to reflect, you will easily recall numerous purchasing decisions that you have made based on whether the retailer won or lost your trust.

Thus a discussion about how to price dynamically without undermining customer trust is important as this retailing practice spreads into more and more sectors. As we noted in our infographic What’s Your Take on Dynamic Pricing, dynamic, or real-time, pricing is “the strategy of flexibly adapting the price of products or services to market circumstances”. Those market circumstances include (but, as my lawyer would say , are not limited to): supply and demand, customer profile, regional variations, time of year, price elasticity and the pricing practices of relevant competitors.

The growth of e-commerce has spawned powerful pricing intelligence and optimization platforms that make it easier for retailers to track these market circumstances as well as to implement dynamic pricing. As we have noted in our competitive pricing trend reports, in every vertical Amazon is the champion of dynamic pricing, changing prices as often as 15 times a day on many products in a given assortment.

Maintain Customer Trust

For insights on how retailers can reap the margin benefits of dynamic price optimization without undermining customer trust, we turned to some consumer behavior research that has been carried out in recent years, and here are the highlights:

1.  Insight: The magnitude and timing of the price changes are closely correlated with the consumer’s perception of the retailer’s price fairness: A significant price drop very shortly after a purchase undermines consumer trust in the retailer’s transparency and has a negative impact on re-purchase intentions.[2]

Tip: Keep price changes moderate and, wherever possible, give the consumer the benefit of an impending price drop.

2.  Insight: Loyal customers, i.e., returning customers, will react far more negatively to perceived price unfairness than first-time customers.[2]

Tip: Since customer retention is of paramount importance, retailers must go out of their way to ensure that their loyal customers feel that they are always getting the “best” price.

3.  Insight: There is an inherent conflict between customer relationship management, which focuses on the lifetime revenue per customer, and customer-centric revenue management, which focuses on maximizing revenue from each individual transaction. Dynamic pricing that results in unexplained price differentials leads to diminished trust in the seller.[3]

Tip: Retailers must strive towards consistent implementation of dynamic pricing across individuals and time  and ensure that accurate and complete information is provided to the consumer at all times. For example, dynamic pricing that presents an unexplained price increase during the checkout process can undermine the consumer’s long-term trust in the seller.

4.  Insight: When dynamic pricing is in the form of a price-framing tactic (such as $ off, % off, free cash coupon or free gift), it significantly lowers consumers’ perceptions of price unfairness, distrust, reductions in value and significantly enhances (re)purchase intentions.[1]

Tip: Rather than just lowering a price, offer a discount or benefit. In terms of the price-framing tactics noted above, the study showed that online consumers preferred dollar off more than percentage off as well as preferred a free cash coupon more than a free gift. However, percentage off or free gift actually yielded better results.

If you are going to be at Retail’s BIG Show, we cordially invite you to join the Revionics/Zebra session “The Right Price at the Right Time – Mobile Price Management and Compliance” for important tips on how your trust-enhancing dynamic pricing tactics can be implemented in real-time and seamlessly across all of your customer touch-points, including brick-and-mortar locations.

References

[1] Fei Lee and Kent B. Monroe (2008) ,”Dynamic Pricing on the Internet: a Price Framing Approach”, in NA – Advances in Consumer Research Volume 35, eds. Angela Y. Lee and Dilip Soman, Duluth, MN : Association for Consumer Research, Pages: 637-638.

 [2] The Impact of Perceived Price Fairness of Dynamic Pricing on Customer Satisfaction and Behavioral Intentions: The Moderating Role of Customer Loyalty, Bo Dai, 2010

[3] Una McMahon-Beattie “Trust, fairness and justice in revenue management: Creating value for the consumer”, Journal of Revenue and Pricing Management (2011) 10, 44–46