Source: Brandon Hickie, OpenView Venture Partners
With Big Data going mainstream and the cost of data storage and processing precipitously falling, should we expect 2015 to be the year when more B2B SaaS companies move to dynamic pricing models?
What is Dynamic Pricing?
Dynamic pricing is the process of setting prices for a good or service based on the fluctuation of other market factors in real-time. Dynamic pricing models are typically adopted to correct for revenue loss from a misalignment in supply and demand in a company’s static pricing model.
Example: A hotel pricing rooms based on travel day/time and room capacity.
Dynamic Pricing Models Increasing in Popularity in Recent Years
Dynamic pricing has become more popular in the B2C service and ecommerce spaces over the last several years as firms have realized that they are missing out on lost revenues due to inefficient pricing practices.
- eBay was one of the first eCommerce websites to bring dynamic pricing to customers when it introduced its auction-based market place. Since then many other ecommerce companies have adopted dynamic pricing models to increase profit margins. Today, most successful online retailers use some form of dynamic pricing. Kohl’s, a brick and mortar retailer, has even tried to roll-out dynamic pricing in its stores with electronic pricing tags controlled by a central system.
- All major airlines use dynamic pricing based on number of seats available. This practice helps moderate demand and ensures that they have full flights with customers paying optimal prices.
- Even some traditional entertainment businesses like the San Francisco Giants, have introduced dynamic pricing to maximize profits.
- Some service businesses have even used dynamic pricing to maximize utilization of their services during down periods so that they can maximize revenues while controlling costs. We have seen this with utilities and the movement towards smart meters and variable pricing models based on weather and demand. Similarly, startups like Uber have introduced dynamic pricing to the taxi industry to take advantage of inefficient pricing and capacity planning models.
Why have B2B SaaS companies been slower to adopt dynamic pricing models?
- Incentives are not aligned between the users and the buyers like they are in a B2C market, so seeing the price increase only directly affects the behavior of buyers who are also users. This really limits the extent to which this type of pricing model can work in many B2B businesses.
- Enterprise customers are looking for predictable operating costs and dynamic pricing adds a layer of unpredictability to their financial planning. Many enterprises are moving towards SaaS-based services to simplify contracts and commitments for their organizations. Most companies in this space have opted to use segmented pricing models that allow them to price discriminate based on specific customer characteristics such as volume, industry, etc. This allows them to increase the efficiency of their pricing models without sacrificing the benefits of having predictable pricing.
- Developing and managing a dynamic pricing model requires a significant investment in human capital and computing power, so it may not be worth the expected benefits.
Does this mean that there is no place for Dynamic Pricing in B2B SaaS Markets?
No, but it certainly suggests that we will not see a mass dynamic pricing model adoption trend this year amongst B2B SaaS companies. However, we may see more infrastructure as a service (IaaS) or other companies with significant capacity/supply planning aspects to their business and a consolidated user base make the move to dynamic pricing models. The benefits are very attractive to these types of companies.
About Scale Finance
Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices throughout the southeast including Charlotte, Raleigh/Durham, Greensboro, Wilmington, Washington D.C. and South Florida with a team of more than 40 professionals serving more than 100 companies throughout the region.
