Thanks to airline tickets and Taylor Swift, everyone is familiar with dynamic pricing these days. But the actual concept — even among pricing professionals in certain sectors — is not clearly understood. In automotive, it is often misunderstood.
Dynamic pricing is simply a flexible pricing strategy, often executed in real-time, driven by the variability of influencing factors such as competition, market conditions, demand, and other factors. The goal is to optimize revenue and profit for every scenario. Each input needs to be balanced against the other to achieve the desired optimization — the emphasis is on the optimization, not the influencing factors.
But the misalignment stems from focusing on the factors, either in combinations or worse, individually. For example, if you simply move prices up or down on snow tires because a blizzard is expected in three days, you are ignoring the fact that the competition may be doing the same thing. In that case, do you end up losing revenue?
In aftersales, I see instances of such misplaced ideas about dynamic pricing all the time. Often a company may have toyed with it, without the right approach or tools, and got burned in the process. Others simply stayed away. Such misguided attempts often take a life of their own, creating hushed myths around dynamic approaches in product and price management teams.
Below are some of the common ones I come across.
Myth 1: Dynamic pricing won’t work in aftersales
Dynamic pricing in its current form precludes digitization, and automotive part sales has one of the lowest penetration rates in e-commerce. Hence, the logical conclusion is this pricing strategy is not suited for the aftermarket.
First, the majority of DIY sales — about 25 per cent of all part revenue — in the U.S. have already shifted online. Yes, it is only a quarter of overall transaction value but that still equals about $40 billion, according to Auto Care Association data. Moreover, that number is growing at a faster rate than physical sales.
Second, dynamic pricing does not simply mean by-the-second changes. That may be the floor for Amazon or Air Canada, but “real-time” is different for each industry. Changes could be daily, weekly or monthly, as long they are effectively responding to the business conditions of that period. Major North American part retailers are already using dynamic pricing, by and large successfully. Some OEMs have started to roll out the strategy for collision parts, and it is working well for them.
Myth 2: Dynamic pricing equals price gouging
Customer “exploitation” may be the most contested — and equally misunderstood — aspect of dynamic pricing. While it is hard to defend $4,000 concert tickets, in most scenarios dynamic pricing can benefit both customer and company.
For instance, airline tickets are cheaper at certain times of day, week or month, or by stopover layers. There are plenty of YouTube tutorials on how to get the best pricing on e-commerce sites, many of which use some form of dynamic pricing.
For the company, an effective dynamic strategy is simply getting the right price position balanced between supply and demand. Yes, it does push the limits of what the customer is willing to pay for a product, but the opposite holds true as well if done correctly.
The goal is to optimize revenue and profit for every scenario. Each input needs to be balanced against the other to achieve the desired optimization — the emphasis is on the optimization, not the influencing factors.
Myth 3: Dynamic pricing does not fit with B2B sales
Commercial sales drive the majority of part sales in automotive, and most of these sales are made to independent repair shops and fleets. Many of these transactions happened over the phone even a few years ago but the shift to digital purchases is happening fast. No surprise that big parts retailers have been heavily spending on improving their B2B e-commerce tools.
These platforms can easily facilitate the use of dynamic pricing. Do repair shops order parts more often during certain times of the day or week? Are technicians willing to pay more for high-volume time periods? Can you entice them with better prices during low-traffic periods? The conditions driving dynamic pricing in B2B are limitless.
Once these business factors — along with other variables — are effectively captured via these platforms, dynamic pricing can be actioned for business customers.
Myth 4: I am a supplier or OEM. Dynamic pricing does not matter to me
No matter how many times I hear this one, it still surprises me.
It’s true that in the North American market, suppliers do not set end-customer prices. Retailers and warehouse distributors price out to vehicle owners and shops. Automakers do provide MSRPs, but dealers are largely free to sell a part at any price. But, if part sellers across the channel are adopting some form of dynamic pricing — which they are slowly but surely — then the end pricing reflects back on the supplier or OEM brand.
Are these prices exceeding or falling below certain thresholds? How would that impact sales? Should there be minimum advertised pricing (MAP) thresholds in place where suppliers and OEMs have input? Industry stakeholders higher up the value chain need to work closely with their seller partners to ensure that their brand value and price positioning are being maintained through dynamic pricing strategies.
Myth 5: There is no ROI in dynamic pricing
This is the trickiest to disprove. Companies often fail at dynamic pricing while burning through investment — this is true. They spend a lot of money on software and processes, but the promised benefits do not materialize.
Poor implementation is often to blame. Sometimes, these strategies are often thrust upon pricing departments without proper context or conviction. Some teams can be resistant to the strategy itself because of the above misconceptions. But often I find companies attempt dynamic pricing — or some version of it — without proper data.
Dynamic pricing is as good as the inputs, and any attempt at the strategy without actionable, high-frequency and relevant data is a guaranteed ROI killer. Many companies in aftersales rely heavily on internal data and simply extrapolate those numbers to generate industry guesstimates. Many think that price crawlers — the use of automated data extraction to match market pricing — alone can power dynamic pricing.
If aftersales stakeholders want to maximize ROI in dynamic pricing, they must up their data game. They must create internal processes to create, consume and digest data.
Kumar Saha is Vice President (U.S.)/managing director (Canada) of global automotive data firm Eucon. He has been advising the North American automotive industry for over a decade and is a frequent conference speaker and media commentator. He is based out of Toronto.
This article originally appeared in the November 2023 issue of Jobber News