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  • Samradni

What is Algorithmic Pricing?

Updated: Mar 11, 2021

What?

Algorithmic pricing is a pricing strategy that makes use of automation to set the prices dynamically.

These price changes are based on things like customer behavior.

This strategy is quite common in highly competitive industries, where setting a fixed price for products might not turn out to be the best thing to do.

The algorithms behind the prices can be based on self-learning or A/B testing.


Make it easier, please?

Let’s look at a story

Mahima is at work, working around a presentation to be presented later in the day to her bosses.

Just then her phone pops a Whats App notification ‘You have been added to the group Riddhi’s wedding’.

It’s a destination wedding in Goa, and while Mahima has already blocked her leaves at work, she still hasn’t booked her flight tickets.

The group acts as a reminder and she opens the Make My Trip app on her phone to check prices.

The cost shows ₹4800 for the return flights.

Mahima is pleased because it fits her budget.

She decides to book the tickets after getting the salary for the current month.

A week passes by, now she has received her salary but when she opens the Make My Trip app to book her tickets, the cost now shows ₹6700 return.


Have you been in Mahima’s situation before? I definitely have been.

Now we know the pricing strategy adopted by Make My Trip is some sort of Algorithmic pricing.


Features?

Besides Dynamic pricing, other features of Algorithmic pricing include the following:


1. Personalization

It helps in personalizing certain elements based on discounts and special offers.

It can also take into consideration customer preferences and buying patterns


2. Guaranteed Optimality

Since its data-driven, it can ensure price optimality and possibly discover lost opportunities.


Risks?

Oh, the number of times I have cursed myself for checking hotels or flight tickets online much before the booking date.

No one likes fluctuations, and especially when it comes to the pricing bit.

Brands that are focused on utilizing optimal metrics to get the best price, may lose out in the bargain.

Since they are missing out on the bigger picture of customer experience and loyalty. Extreme cases of Algorithmic pricing can also lead to attention from regulatory bodies for unfair practices.

This can happen if your constant price changes are referred to as false advertising.


Brand Examples?

As mentioned earlier, the Algorithmic pricing strategy is most often used in very competitive industries.

We have already explored the airline industry.

Another example is e-commerce.

While it’s very difficult to gauge Amazon algorithms when there are so many retailers offering the same product with different prices, there is definitely some Algorithmic pricing involved here.

How else are retailers picked up based on who gets featured and who doesn’t?

Another example can be of hotel bookings, depending on the demand for a specific hotel at a destination, the prices can be altered.


Overall, Algorithmic pricing can definitely help your brand reach optimality however it needs to be incorporated keeping in mind all the risks involved.

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