You can avoid the downsides of dynamic pricing with some basic guardrails, overrides, and communication tactics.
More and more companies are turning to pricing algorithms to maximize profits. But many are unaware of a big downside., a marketing professor at Esade Business School in Barcelona, says constant price shifts can actually hurt the perception of your brand and its products. He warns that employing AI and machine learning without considering human psychology can damage your relationship with customers.
Marco Bertini, a marketing professor at Esade Business School in Barcelona, says constant price shifts can actually hurt the perception of your brand and its products. He warns that employing AI and machine learning without considering human psychology can damage your relationship with customers. Joining us today to explain the harm that dynamic pricing causes and how to manage it is Marco Bertini. He’s a marketing professor at ESADE Business School in Barcelona and a visiting professor at Harvard Business School. With Oded Koenigsberg of London Business School, Bertini also wrote the HBR article, “The Pitfalls of Pricing Algorithms”. Marco, thanks for coming on the show.
But if you wind the clock back a century or so, it was with bazaars and marketplaces, there was no such thing as a fixed price. There was haggling, right? There was bargaining and every interaction between a customer or a firm led to some sort of price, depending on how price conscious that particular customer was and how much the business wanted to sort of extract that profit.
MARCO BERTINI: Yeah, I would, I would definitely agree. And I think there’s a few things that are worth mentioning. One of them is it’s like a moving target a bit in the sense that social norms change all the time, right? If we wind the clock back aa sufficient amount of years, the thought of all of us paying different prices at a, at a concert, in an airplane, at a hotel was probably a foreign concept. And we would maybe take an objection to that.
So the front end of customer orientation is what we learn in marketing courses, which is: I’ve got a product or a service, and if I really want to do well in the marketplace, what I should be doing is understanding what the customer’s needs and wants and desires are, and then work my way backwards in terms of how to shape that product, how to communicate that product. So I’m being driven by the customer.
And whenever you drive that wedge going back to a comment I made before you start having the customer filling in the blanks, what’s going on? Why did they tell me these in the one hand, but then actually the pricing me that way? Are they standing behind what they’re saying? Are they truthful? Are they giving me what they promised?
MARCO BERTINI: I mean that may be a solution, right? I don’t pretend to understand the fundamental economics of Uber, so I wouldn’t hesitate to sort of give them specific advice. But from where I sit, my objective would be to sit down with them. I mean, we make an example of Uber, but it could be this there’s millions of applications of algorithms. What I ideally like is for organizations to sit down and think beyond the standard economic argument of algorithms.
MARCO BERTINI: Absolutely. Right. Because either we have a fixed capacity that we would like to sort of make the most of or because, and I always tell this to my students, I want to move people around so that there’s a case just a second. There was a case of Disney in the article.
So, the first thing is to understand, in my opinion in my experience, most organizations do not think of prices beyond the sort of the mechanics of it and the numbers of it. Right? So, there’s much more than a numbers thing. So, just like it’s more than a numbers thing when you’re setting prices yourself on an Excel and you change them every six months. It is also more than the mechanics when you’re changing it every second.
Because if I bring something new to market and I really want to understand what they really care about, this one, a great way of learning about it is through some variation in prices, and then seeing how behaviors respond. Think of categories where access becomes, it’s of basic importance. Maybe healthcare, maybe education, maybe insurance. I can just sort of line up a few of these, right? So, in situations where you really want to get all the market covered, because they really should have coverage.
But some understanding of where the variation may arrive to a point that is just it’s extreme, and, therefore, the customer will start saying, what is going on here? Remember, one of the things that I was stressing is that you don’t necessarily want your customers to fill in the blanks.
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