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Dynamic pricing is defined by Nikki Baird (2017) as the strategy of changing a price multiple times throughout the day or week. The most famous example of an industry which applies a dynamic pricing model is the airline industry. Technology allows airlines to develop the best way of optimizing fairs in real-time based on Expected Marginal Seat Revenue (EMSR) (Morris, 2016). Thus, although dynamic pricing was first defined by John Wanamaker already in 1861 (Deloitte Nederland, 2016), the advances of the Internet allowed dynamic pricing strategies to evolve the way they are now, and will be like in the future.

The evolution of dynamic pricing has been divided in 5 waves by Accenture (2016):

Wave 1 is described as the period before 1990 when prices were static and remained unchanged. Wave 2 started when the World Wide Web was launched in 1990, which has introduced the concept of dynamic pricing as a way of managing supply and demand. The launch of Amazon and E-bay in respectively 1994 and 1995 have changed the dynamics of competition, prices became more transparent leading to companies adapting their prices according to competitor’s price levels. The inception of mobile shopping applications have driven the pricing dynamics towards wave 4 from 2010, called “Omni-channel experiences”. This wave represents the advancements in digital and mobile technology, allowing for price-matching to become the new normal. The last wave that Accenture (2016) identifies, which starts in 2016, is the “advent of contextual pricing” in which they predict that an individual’s characteristics will determine the price one pays for a product or service.

Pricing policies based on analysis of individual’s personal characteristics could lead to charging customers based on their spending behavior. Data analysis might for example find that somebody who is likely to spend a large amount of euros on clothing, is also more likely to pay more for a hotel booking. Eventually, this policy will lead to an economy where the larger spenders pay more for the same products and services.

The question we need to ask ourselves now, is if pricing based on these kinds of individual characteristics is a desirable development in our society. Is pricing based on personal characteristics similar to pricing based on external factors such as weather conditions? Both influence the demand for a certain product or service, but is it ethical to disadvantage people based on their personality, or is this going towards discrimination?

References

Accenture. (2016). Build dynamic pricing into your customer experience. [online] Available at: https://www.accenture.com/t20161216T025827Z__w__/sg-en/_acnmedia/PDF-36/Accenture-Strategy-Dont-Set-It-Forget-It.pdf#zoom=50 [Accessed 15 Oct. 2017].

Baird, N. (2017). Forbes. [online] Forbes.com. Available at: https://www.forbes.com/sites/nikkibaird/2017/04/18/dynamic-pricing-when-should-retailers-bother/#3abfe8b621be [Accessed 15 Oct. 2017].

Deloitte Nederland. (2016). Dynamic pricing in retail | Deloitte. [online] Available at: https://www2.deloitte.com/nl/nl/pages/data-analytics/articles/dynamic-pricing-in-retail.html [Accessed 15 Oct. 2017].

Morris, H. (2016). How airlines set the price of their tickets – and what you can do to beat them. [online] The Telegraph. Available at: http://www.telegraph.co.uk/travel/advice/how-airlines-set-the-price-of-flight-tickets-and-how-to-beat-them/ [Accessed 15 Oct. 2017].

 

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Cadillac has launched a subscription service called Book, which allows customers to drive in any Cadillac car they desire, whenever they desire it (The Verge, 2017). According to The Verge (2017) a subscription to a Cadillac car costs a customer 1500 US dollars a month, including registration, insurance and maintenance. The subscription requires a one-time start fee of 500 US dollars, but it also allows a customer to quit the service whenever they like. Also, customers can swap cars up to 18 times per year (Business Insider, 2017).

Cadillac is not the only company delivering its products on a subscription basis to its customers. Well-known examples are Netflix, which allows customers to watch unlimited series & movies for around 10 euros a month, Amazon, which allows customers to have free deliveries of Amazon orders throughout the year with Amazon Prime, and a less famous one: Rent The Runway, a website that makes designer clothing available to its customers through a subscription (Rent The Runway, 2017). Hence, it seems the subscription model has been widely implemented by companies now. The Economist Intelligence Unit (2013) supports this statement by publishing a research in which they surveyed 293 business executives from the United States, United Kingdom and Australia. Around 80% of these executives admitted having noticed the shift in consumer’s wishes concerning access to good & services. 51% of businesses claims to actually be in the process of responding to this shift, of which 40% is implementing a subscription proposition for their offerings.

Companies are keen on investing in a subscription business model as both the customer and company profit from the subscription model. In the eyes of the customer, a subscription brings three main advantages according to Writer (2017):

• Convenience (receiving what you want, right when you need it)
• Insight in costs (because of the periodic rate, the customer knows the exact costs)
• Ability to bundle (receiving a price advantage by buying bundles for example)

Selling subscriptions to products & services instead of selling the products and services themselves, brings businesses accurate predictions of guaranteed revenue. According to John Warrillow, a subscription-based company has a relative high percentage of recurring revenue, which is one of the key determiners in a company valuation (Writer, 2017).

So, why have subscriptions only become so popular recently?
The reason for subscription models only recently gaining so much popularity is because this business model is enabled by technology that allows customers to easily use products and services (The Economist Intelligence Unit,2013), and by technology that allows businesses to build high quality customer relationships (Forbes, 2017). To build deep relationships with all your customers, you need data. It just so happens that 17 years ago, data was not as available to businesses as it is now. Even small companies are able to track and analyze every customer or potential customer activity. These insights and analyzation capabilities, enable companies to gain understanding in the needs and wishes of their customers, leading to the possibility of continuously improving customer satisfaction (Forbes, 2017). According to Forbes (2017), the key in building a subscription business is namely that companies need to build deep relationships with their customers. In conclusion, the idea of a subscription-based model is nothing new, but the innovation concerning data analytics have allowed this business model to regain attention from entrepreneurs as well as legacy companies.

References

Business Insider. (2017). I tried Cadillac’s $1,500-per-month subscription service for cars to see if it’s worth it. Business Insider. Retrieved 27 September 2017, from https://www.businessinsider.nl/cadillac-book-subscription-car-service-review-2017-2/?international=true&r=US

Forbes. (2017). How The Subscription Economy Is Disrupting The Traditional Business Model. Forbes.com. Retrieved 27 September 2017, from https://www.forbes.com/sites/kimberlywhitler/2016/01/17/a-new-business-trend-shifting-from-a-service-model-to-a-subscription-based-model/#178163414a5f

Forbes. (2017). The Not-So-New Promise Of The Subscription Economy. Forbes.com. Retrieved 27 September 2017, from https://www.forbes.com/sites/valleyvoices/2017/05/17/not-so-new-promise-of-subscription-economy/#7d99a1f43437

Rent the Runway. (2017). Rent the Runway. Retrieved 27 September 2017, from https://www.renttherunway.com/shop/rent_my_style_hp_landing

The Economist Intelligence Unit. (2013). Supply on demand Adapting to change in consumption and delivery models. London, Hong Kong, New York, Geneva: The Economist. Retrieved from https://www.eiuperspectives.economist.com/sites/default/files/EIU_Zuora_WEB_Final.pdf

The Verge. (2017). Cadillac is launching a car subscription service for $1,500 a month. The Verge. Retrieved 27 September 2017, from https://www.theverge.com/2017/1/5/14177698/cadillac-book-car-subscription-service-1500-a-month

Writer, C. (2017). Why You Should Use a Subscription Business Model. Entrepreneur.com. Retrieved 27 September 2017, from https://www.entrepreneur.com/article/243573