The airline industry invented a great pricing model many decades ago. That model changed the sector and cushioned airlines on the path of creating value for their stakeholders. Simply, owing to information asymmetry due to lack of knowledge on what any specific customer could afford for tickets, the only way to get the highest possible aggregated revenue was to price the seats at different levels. Just like that you have the Economy Class, Business Class and the First Class. The same plane, but different seat prices, and everyone feels fine. You do not have the money for First Class but you are happy that the amount you have can get you into Economy. The woman that can afford her First Class is happy she has her own world. Largely, it works. With that strategy, a new dawn for the airline industry was born many decades ago.
Today, I think African ecommerce companies must revisit the model in their businesses. No pricing strategy is perfect but classifying all customers as the same is not necessarily smart. What we are doing across African cities may not be optimal: I continue to see prices which are static despite changing many parameters on the ecommerce websites.
We are making progress, of course. Most are adopting value-based pricing over just cost-based pricing, focusing on the value the customer expects to derive, to open their wallets. Nevertheless, I expect us to go further with dynamic pricing engineering in our markets. Dynamic pricing requires the deployment of artificial intelligence and analytics to help ascertain market pricing inefficiencies. What it does is two-fold: firms make more money even as customers feel better.
The pros discuss the constructs of cost-based pricing and value-based pricing: “Value-based pricing is the setting of a product or service’s price based on the benefits it provides to consumers. By contrast, cost-plus pricing is based on the amount of money it takes to produce the product”. Deciding the model to adopt for the optimal value creation, in your startup, is the next level as you fix the launch date.
iROKOtv, the video on demand startup, certainly leaves money on the table when it does not take into considerations if the subscriber in Cape Town can pay more compared to one in Freetown (Sierra Leone). But doing that will also put iROKOtv in trouble. Customers will think of discrimination based on locations. Though using locations to price products is common, but it is not usually done for most consumer products which are sold on subscriptions as the pricing visibility could alienate some customers.
However, for ecommerce firms, there is an opportunity for dynamic pricing since they run a market with many items which cannot easily be associated across board. The pricing of items is not that transparent when compared to a subscription-based business like iROKOtv’s. The ecommerce firms can deploy dynamic pricing that will capture different ranges of prices which their customers can pay. And they can do it at scale.
I have some ideas on how this can be implemented. Yes, you can do it without antagonizing extremely price-sensitive customers. Make prices in the customer shopping cart to change as they make decisions in real-time while on the site. Besides the typical product cost, you can tie the price change based on the following:
- Location: do they live close to your warehouse?
- Payment method: are they paying online or are they doing Pay-on-Delivery?
- Waiving Return: are they waiving the option of ever returning?
- Bundling: are they buying many different items at the same time?
- Total Purchase: have they crossed a purchase range to activate across the board 2% discount?
- Pick-up: is customer picking up himself or herself?
There are many ways a company can model these factors to help buyers make decisions and see price changes in real time. Today, if someone buys an item in Lagos, it is not clear if Konga, Jumia, and Yudala take into considerations the specific address of the customer to the location of their warehouses. My point is that you can use dynamic pricing to influence the behavior of customers. If a buyer knows that purchases above $100 with self-pick can attract across the board 2% discount, he can be influenced. That buyer can plan his/her day to do the pickup. If a customer knows that by bundling items that more discounts will come, it can decide to buy all family items from that ecommerce ecosystem. Delivering all these pricing elements dynamically and in real-time will stimulate the customer to open his or her wallet.
African ecommerce companies will need deep machine learning in pricing. That will help them get better value from customers by using dynamic changes in price to redesign how customers shop on their sites. The static pricing mechanism we have today must evolve. Mathematics will help accelerate the progress we are making in the industry. The pricing psychology is now delivered in real time and personalized. We need that adoption at scale.
If I know that you are living at the back of my warehouse, using either your GPS data in my shopping app or the address you provided, we can waive 0.5% of your shopping cart because we can easily deliver. But when we see that you are living far away, but in a military location reserved for families, with potentially many members, we can structure our model for you to save by bundling. That knowledge and capability must be part of the game. The customers are hooked in real time to see value by buying from you.
An ecommerce firm must have the capacity to predict how customers are responding to a product, at personalized level, and deliver price changes in real time. This can happen many times even when the customer is shopping. Airlines do that all the time and we need that engineering to create more value.
Static pricing is broken. The startup leaves money on the table. The rich is happy but the poor may not easily get on board because the balance tends towards high price. Dynamic pricing for ecommerce firms can help them manage that scenario and become like airlines where everyone can be addressed at different entry points for the same item.
Every ecommerce company operating in Africa must create models that it can offer everyday “dynamic low-prices” to all classes of its customers. The low does not mean absolute low amount. Rather, it must be based on factors driven by its perception of the customers. You can offer a Victoria Island buyer a product at N2,000 because you have predicted that the office is on the way of your distribution path, while another person in Marina gets same for N2, 100 because the delivery man has to spend 40 minutes to deliver to him. But to the Ikeja buyer at N1,900 as that customer has never returned any item she bought over the last two years.
You must have the capability to engineer new pricing models to win. That ability to have First Class and Economy Class in the same air-tube must be replicated in the ecommerce ecosystem. Yes, the bank manager can buy his detergent at N1,000 while the market woman gets the same product at N800. And both buyers must feel like they got real bargains from your portal. Nothing can do that today than deploying dynamic pricing.