Time-based pricing
From Wikipedia, the free encyclopedia
 | This article may require cleanup to meet Wikipedia's quality standards. Please improve this article if you can. (July 2007) |
Time-based pricing refers to a type offer or contract by a provider of a service or supplier of a commodity, in which the price depends on the time when the service is provided or the commodity is delivered. The rational background of time-based pricing is expected or observed change of the supply and demand balance during time. Time-based pricing includes fixed time-of use rates for electricity and public transport, dynamic pricing reflecting current supply-demand situation or differentiated offers for delivery of a commodity depending on the date of delivery (futures contract). Most often time-based pricing refers to a specific practice of a supplier.
Time-based pricing is the standard method of pricing in the tourist industry. Higher prices are charged during the peak season, or during special-event periods. In the off-season, hotels may charge only the operating costs of the establishment, whereas investments and any profit are gained during the high season. (This is the basic principle of the long run marginal cost (LRMC) pricing, see also Long run). Time based pricing is occasionally used by transportation service providers, whereby higher prices are charged during rush-hours, or, alternatively, some type of reduced-rate tickets are invalid at that time.
Time-based pricing of services such as provision of electric power includes, but is not limited to:[1]
- time-of-use pricing (TOU pricing), whereby electricity prices are set for a specific time period on an advance or forward basis, typically not changing more often than twice a year. Prices paid for energy consumed during these periods are preestablished and known to consumers in advance, allowing them to vary their usage in response to such prices and manage their energy costs by shifting usage to a lower cost period or reducing their consumption overall;
- critical peak pricing whereby time-of-use prices are in effect except for certain peak days, when prices may reflect the costs of generating and/or purchasing electricity at the wholesale level
- real-time pricing (also: dynamic pricing) whereby electricity prices may change as often as hourly (exceptionally more often). Price signal is provided to the user on an advanced or forward basis, reflecting the utility's cost of generating and/or purchasing electricity at the wholesale level; and
- peak load reduction credits for consumers with large loads who enter into pre-established peak load reduction agreements that reduce a utility's planned capacity obligations.
Time-based pricing is recommendable for utilities both in regulated or market based environment. The use of time-based pricing is limited in case of low difference between peak- and off-peak demand, unavailability of adequate time-of-use metering. Also, customer response to time-based pricing should be considered (see: Demand response).
A regulated utility will develop a time-based pricing schedule on analysis of its cost on a long-run basis, including both operation and investment costs. A utility operating in a market environment, where electricity (or other service) is auctioned on a competitive market, time-based pricing will reflect the price variations on the market. Such variations include both regular oscillations due to the demand pattern of users, supply issues (such as availability of intermittent natural resources: water flow, wind), and occasional exceptional price peaks.
Price peaks reflect strained conditions on the market (possibly augmented by market manipulation, see: California electricity crisis) and convey possible lack of investment.
Why do retail stores need dynamic pricing? With respect to the key objectives of growth and profit for any retail entity, dynamic pricing should significantly improve sales margins and increase sales by enabling the vendor to price variably and hence suitably and to control its product range based on profit margins. The retail stores will be able to compete more effectively with rivals in the form of mixed multiples, mail order and online retailers, who are often able to undercut but who do not generally have the same understanding of the retail market. In particular dynamic pricing is recognised as encouraging impulse buys, cross-selling of products and repeat sales.
How will dynamic pricing address the key stakeholder issues? Key concern for a consumer would be the availability of desired products 'at the right place, at the right time and for the right price'. The new information flows established to implement dynamic pricing should allow retail stores to update consumers as to the current and future availability and price of products. Suppliers demand responsiveness, volume sales, and the availability of demand and forecasts. Dynamic pricing will improve responsiveness by prioritising the sale of new products while ensuring that pricing decisions enhance its ability to sell more products. Finally, the new information flows can be shared with suppliers and distributors.
What will the introduction of dynamic pricing involve? The key steps are the effective integration, analysis and understanding of EPOS, customer, competitor and supplier data to monitor existing and future product range.
Where lies the congruence with retail policies? Dynamic pricing relies on target retail objectives (i) enhanced customer relationships; (ii) supplier relationship management; and (iii) inventory management.
What are the key risks involved? The processes required to implement dynamic pricing build on existing processes and on the processes required for the recommendations needed to reform the key company objectives listed above. Critically, dynamic pricing requires minimal ongoing external input.
Benefits of dynamic pricing
This strategy helps retail outlets to increase repeat purchases as well as enhance the ability to cross-sell products, depending on the volumes data received from EPOS, dwindling value of products held back at the warehouse or in the backroom of the outlet could be a measure of the effectiveness of this benefit.
Brand awareness could be increased which would be measured by number of product recalls and returns compared to the estimate of expected repeat purchases for competitors.
Another benefit of dynamic pricing could be increasing the margin of sales, thus maximising profits which could be a measure of the total percentage of sales to the 25% margin from EPOS data. This also reduces the risk of obsolete inventory, by measuring improvement in sales against products already ordered but not purchased due to them going out of vogue.
Typically, the responsibility of this implementation would lie with the marketing or the merchandising departments, i.e. if responsibility for brand awareness lies with the marketing department then the responsibility for margins and sales would lie with the merchandising department to ensure tacit co-ordination between the two.
Dynamic pricing could also help increase the volume of repeat customers indicating strengthening and retaining of existing customers leading to reduced churn rate. This could be further fostered by use of loyalty card schemes under the supervision of the marketing department. Ordering inventory restricted to requirement saves holding additional and perhaps outdated stocks which results in reduced inventory levels. This effect could be measured by the declining value of products held in the warehouses.
Sales of discounted products taken from EPOS could be a measurement of the effect of higher discounts and increased promotions and marketing campaigns, under the direction of the marketing department, as a causal effect of dynamic pricing.
Process and Implementation
Dynamic pricing is facilitated through pricing range over the product lines by pricing and demand forecasts based on past trends identified from the data available. Weekly meetings to sign off new product ranges and change in prices while time reviewing existing products for promotion (for obsolescence).
EPOS needs to be integrated with electronic pricing in stores by installing electronic price displays on shelves and setting up interactive store links. This could help in monitoring and displaying direct co-related sales value and price variation responses with the suppliers through vendor managed inventory.
Monthly evaluation and comparison of competitor prices and self-analysis based on activity based costing (from supplier to sale) will be required for which EPOS serves as the source for collating information on demand while activity based costing serves as basis of prices. Business growth can be propagated by analysis of profitability and statistics of existing stores to identify trends, for which a formal business case may need to be prepared, needing the involvement of regional managers to assess demand.
Dynamic pricing could involve significant business redesign depending on the present infrastructure and the ability to deliver desired data. In order to record and monitor customer data, key activities such as loyalty card schemes, updating of EPOS to record sales and staff training for recording sales would required to be initiated. EPOS needs to be updated to record and monitor by product range as well as by stores which would facilitate price and product changes in response to changes in demand as well as developing future decision making process.
In benchmarking of competitor pricing and product range, key activities would involve setting up of an integrated data base at head office recording weekly price and product data fluctuations of competitors. New methodologies will be required to analyse total costs per product and its contribution to bottom line in proposing a full costing method for product lines.
Dynamic pricing could also help increase the volume of repeat customers indicating strengthening and retaining of existing customers leading to reduced churn rate. This could be further fostered by use of loyalty card schemes under the supervision of the marketing department. Ordering inventory restricted to requirement saves holding additional and perhaps outdated stocks which results in reduced inventory levels. This effect could be measured by the declining value of products held in the warehouses.
Sales of discounted products taken from EPOS could be a measurement of the effect of higher discounts and increased promotions and marketing campaigns, under the direction of the marketing department, as a causal effect of dynamic pricing.
Negative customer impact of dynamic pricing
Customers of Amazon.com were startled and quite upset when they learned that the online mega-store was charging different customers varying prices for the same DVD movies. Amazon, it appears, was engaging in a form of "dynamic pricing" – an innovative pricing mechanism made possible by recent advances in information technology. By using the plethora of information gathered from customers – ranging from where they live to what they buy to how much they have spent on past purchases – dynamic pricing allows online companies to adjust the prices of identical goods to correspond to a customer's willingness to pay. This resulted in a hoard of negative publicity for Amazon and the company had to take some drastic measures including heavy discounts to stem the tide of complaints.
