Pricing can appear simple from a consumer’s perspective. You just see a price, and if you are willing to pay it, then you get the product. The key part of that decision making is if you are willing to pay for it.
Through the years businesses have broken down the psyche of consumers that help them decide to ultimately buy the product. As humans have changed their shopping habits, the pricing industry has evolved with it in order to stay at the forefront of sales. Although there are countless amounts of pricing strategies, there are trends within specific sectors.
An auction is the oldest way to sell a product. This strategy was how the majority of the items were sold in 500 B.C in ancient Greece. Since that time period, it has evolved into a very unique selling approach. It has such a narrow market now due to the high transaction cost.
Products that are still sold through this technique are typically seasonal unique items with high demand and low supply. This is due to the lack of standard prices available. People who are looking to purchase these items are willing to pay more because there is no other way for them to get that good.
There are numerous types of auctions so we are going to just focus on the three most prominent: English auction, Dutch auction, and the auction market.
English Auction: This pricing is the one you probably have seen since it is the most common type. It is most effective with more rare types of products such as wine, art, old cars or antiques. For this, the buyers yell out prices the different prices are willing to pay for the item, starting at the lowest and increasing in price until the biggest price wins.
In 1995, Pierre Omidyar, revolutionized the e-commerce sector by introducing the first English auction e-commerce: Ebay. This website brought the thrill of auctioning to millions worldwide.
Dutch Auction: The Dutch auction is the polar opposite of the English version. Instead of starting low and increasing the price, the highest price the seller wants to sell it at is announced. From there he/she will lower it until there is a bidder that is willing to pay that price.
This specific type of auction is used in the Netherlands to sell farmers produce. Due to the specificity of its usage, it is being seen used less and less.
Auction Market: You may also know this as the double action market. This type of auction is less organized than the others because there is bidding from both sides of the sale. There are multiple buyers and the sellers, and they all enter a competitive bid. Then based on the prices given, the buyer and seller with similar numbers are paired up and then the transaction is completed.
The New York Stock Exchange or the US Treasury auction are both great examples of the double action market. They truly showcase the application of this type of auction and the chaos that it can cause.
It wasn’t until the 1840s that an Irish Immigrant, Alexander Turney Stewart, thought that there could be a more efficient way of buying goods other than auctions. His ingenious idea was to create a store with posted prices, or a ‘no haggling policy’. This eliminated the dissatisfaction either the buyer or seller got from auctions while almost streamlining the sales time to maximize profit from each purchase. Stewart’s idea has exploded since then and is now dominating all commerce for more standardized products.
However, now with the debate taken out of the sale, companies were left trying to figure out how to best price their products. They chose from one of these three:
- Cost-based: This type of pricing is typically used by manufacturers because it requires the least amount of consumer information. It is just simply the cost of creating the product plus the percent markup they want.
- Value-based: Companies that use value-based pricing really optimize on the consumer’s perceived value of the product. It is ideal for high end, trendy, name brand items companies or even something that is indispensable to the consumer. A great example of this a drink at a hot open-air festival. The seller knows the consumer will pay almost anything to get the product they want.
- Dynamic: In the past decade, dynamic pricing has really exploded due to how quickly the technology is improving. It uses a series of algorithms to maximize the economic welfare and profit. A huge factor in economic welfare is the number of sales at each price point. That is directly decided by the consumer since he/she has the choice to buy the product or not.
- This pricing strategy has increased in popularity because it benefits both sides of the sale. It is ideal for industries such as flights, hotels, and even the e-commerce sector in general. Amazon and Uber are great examples of success stories using dynamic pricing.
Although there has already been so much progress in the pricing field, there is still a lot more to come. As technopoly for dynamic pricing advances, it will become more relevant than it even is today.
As a consumer, it is important to be aware of the different pricing strategies that companies use. With a better understanding of what is behind each price you see, the hope is you will get to find the best prices and products for you!