What we are willing to pay: Aaron Fuller from Qantas on dynamic pricing
Organisations bet around the supply and demand curve
Aaron Fuller is the head of marketing at Qantas Ventures, the venture capital arm of Qantas Airlines. He spoke with Julian Lorkin for BusinessThink.
An edited transcript of the conversation follows.
BusinessThink: What is dynamic pricing? Is it quite literally just changing the pricing according to demand or the customer?
Aaron Fuller: There's a bunch of factors that go into what makes dynamic pricing. There are some fantastic players in the market that are using dynamic pricing, you could probably say, to the extreme. And there's no greater competitor or brand in the market than Amazon, who publicly have said they change their prices 2.5 million times per day on their catalogue of products.
Dynamic pricing is a company being able to change their prices. So that is usually a digital player – versus a traditional Walmart, for example, [because] if you're at Walmart, or Coles, or Woolworths and you have to change a price, you would [need] a team of people running up and down aisles who are changing the price of beer and nappies, for example, based on some other external event that may have happened.
Dynamic pricing is the ability of leveraging digital technologies and online and the way we shop and research now, to basically go and say, "There's an external thing that's happened". So, Amazon are famous for increasing the price of shoe deodoriser, as an example, when media outlets such as The New York Times or USA Today, or a TV show in the US will talk about shoe deodoriser as a "thing". The signals that Amazon have got have said, "There are now online mentions of a product such as shoe deodoriser. Increase the price of shoe deodoriser from $10 to $18 in real time, in micro-seconds of the mention that's happened on The New York Times [website]."
So dynamic pricing is effectively how companies are using browser behaviour, individual data and also macro factors like an event – a grand final, or weather – to change price.
'It’s a bet that organisations need to make around when the supply and demand curve kicks in’AARON FULLER
BusinessThink: But how are customers reacting if they find that, say, somebody who has never used a service before or has never flown on the airline gets a cheaper price than somebody who's very loyal to it who's charged a bit more?
Fuller: It's a fantastic question. Hotels will often have a price at the start of the year for a Christmas sort of booking hotel night. And as it gets closer to Christmas, they have to take a bet on whether there's going to be a bunch of last-minute bookings, in which they can maintain their price, or whether they have to reduce their price in order to get the capacity. It's a bet that organisations need to make around when the supply and demand curve kicks in.
Now, there's enough business data around for companies such as hotels and airlines to understand when the demand curve comes in. You know when you get all your Christmas bookings, or all your European summer bookings, you know when they come in; [and] there's always an outlier of last-minute bookings.
BusinessThink: It sounds like this is almost an opportunity for a few canny customers who are really determined to get a good price at 5 o'clock in the morning on a very wet Thursday – when the airline or Uber hasn't been in the news for a while – to suddenly get maybe a few dollars off the price. If you're a canny customer, you can do it. Are people really that determined just to save a few dollars?
Fuller: I think there would be a cohort of people that are sort of very savvy in finding the best deals. There are markets for any industry that you work in. If you look at the hotel industry, you look at lastminute.com, you look at wotif.com. So there are marketplaces where you want a Hilton hotel but you don't want to pay Hilton hotel rates; you often find "secret deals" which are branded as secret hotel deals on those channels because Hilton has a capacity issue, and they don't want to be seen to drop price because that has the issue of, "Hey, I've met the guy sleeping next to me in the next hotel room. He paid $500 but I only paid $250." Whereas they bring in an intermediary such as hotels.com or lastminute.com who sell unsold inventory at a discount price, and that is the whole business model for people who are going after that market.
‘Do you still have a sticky customer for the expected duration of that customer’s lifespan?’AARON FULLER
BusinessThink: Dynamic pricing is obviously quite complicated. You need to punch an awful lot of data for it and also have many years' experience of working through the formula.
Fuller: Yeah. So, depending on what vertical you're in, I think you need to understand how much data science needs to be applied to what you're trying to understand. We've been in a world of big data and collecting data now for a good decade in Australia.
Most companies have more data than they know what to do with. And that is really the challenge, which is why businesses such as Qantas have launched businesses such as Red Planet, which is a data business where we're leveraging our own data and other data sources to work out what the right customer experience is, what the right price is, what the right product is. And so, we use data and data scientists and data modellers and people who understand data intimately.
Where you get some really smart, dynamic pricing using the same type of capacity in data science and data modellers is things like Wilson Parking, and parking centres around Australia and around the world, who have dynamic pricing based on known traffic and known capacity routes – whether it's Monday morning, whether it's Friday night, whether it's Friday night and there's a grand final on near you.
Businesses from car parking to airlines to hotels are using data, whether that's to serve up and design what the next product we should sell you is, or talk to you about. We can actually serve up this price to you right now. Different for you than the person right after [you].
Tesco's is an example in the UK which has had digital price tags on their consumer goods down the aisles for a long time, which means that they're not able to change the price for Aaron as he's walking down looking at dog food, but they are able to change the price on dog food multiple times a day without any manual labour.
So that is the ability for Tesco's and supermarkets to change the price dynamically on an item like dog food, potentially because there's been, let's say, a supply and demand issue, where all the dog food manufacturers in Australia have now had an issue with producing dog food and there's a scarce capacity. We've seen that with baby food in the past, with baby formula, where we know the demand is constant but there's a supply issue.
In theory, Woolworths and Coles aren't leveraging this necessarily in real-time like Tesco's are with a digital price tag, [where] you can respond to a real-time event, which is an announcement of a shortage or a scarcity in a product to increase price. [And] where you would be modelling the price based on fixed price, below cost, at-cost, break even and super margin, based on when you're trying to understand the demand and supply patterns and curves.
I guess that's the challenge for businesses who are using data and real-time information to dynamically change the price based on known customer variables or macro variables like seasonality events, or festivals, is that [whether] the long-term benefit outweighs the potential negative backlash that happens from that price change?
That's sort of a science in itself and people such as data scientists and data modellers would be constantly looking for consequences of an action: what's the long-term consequence beyond that day that you get the increased margin from increasing price? Do you still have a sticky customer for the expected duration of that customer's lifespan?
I guess that's the challenge for the industry as dynamic pricing continues to unfold and to become available to companies like Wilson Parking, [and that's] do you hurt the business of Wilson Parking when you've offered me $3 parking for the first three times because it was just coincidental I went there at a lull period, and now you want to charge me $13. Do I decide I'm never going to park at Wilson Parking or do I understand the mechanics of how the world works?