Intelligent Enterprises of the 21st Century

The Internet is reshaping the pricing landscape on the sell side and, because of increased competition and customer segmentation; it is also mandating that firms adopt a dynamic pricing strategy. However, the current studies (Kambil et al., 2002) show not enough companies have integrated dynamic pricing into their online pricing strategies and those that have are not taking full advantage of its potential. If traditional margins are only about 10 percent, then using dynamic pricing to squeeze out an additional five percentage points means a dramatic 50 percent increase in profits but too often companies are not choosing the correct dynamic pricing model for their specific business context, and, indeed, many seem afraid to allow their pricing to change freely with market conditions.

Kambil et al. (2002) state that companies that want to use price to competitive advantage must first develop—as Dell or Buy.com have—sense-and-respond capabilities. They will need to anticipate future demand patterns and customer willingness to pay for different products and services. Fortunately, current Internet technology provides a number of inexpensive solutions for tracking customer behaviours and generating insights, and comparison tools and online robots/intelligent software agents make possible the automatic monitoring of competitor pricing in the retail sector.

Second, companies need to develop internal capabilities for dynamic pricing. This includes creating internal systems that allow visibility into critical parts inventory, and identifying opportunities for clearance pricing or supply inflexibilities that may be addressed through dynamic merchandising or segmentation. Generating visibility into the firm's operational systems will require integration between front-end and backend systems, and often better data warehousing and integration capabilities across multiple firm processes.

Third, many companies not familiar with dynamic pricing and those that are also confronting changing market segmentations will have to build dynamic pricing capabilities. This will require recruiting new expertise and an executive commitment to both the use of new pricing models and to reassessments of the value of specific customers to the firm. Implementing dynamic pricing will also require careful and thoughtful consideration of both the merchandise to be priced dynamically and the frequency of price changes.

Dynamic pricing is not without hazard. Because customers do not want to feel cheated, companies are better off having consistent prices across channels for the same product unless they substantially vary the offer. This is why airlines are better off clearing excess inventory through Priceline.com or Orbitz rather than directly through their own Web sites. They can continue to charge a premium to the last-minute traveler yet capture others through the more anonymous clearance channels that do not make excess inventory visible. And companies can avoid price discrimination-selling the same product at the same time to different customers at different prices-by changing product service attributes such as warranty or delivery.