When looking back on the history of pricing strategies, nothing really stands out until the early 80s. Before the deregulation years, most businesses stuck to a traditional model of rates, based on economic fundamentals such as cost price and profit margin. The rise of neoliberalism allowed for ambitious and previously unseen business tactics, one of them, first developed in the context of airlines, was Yield Management. Understandably Yield Management and, more generally, dynamic pricing, was a true game-changer, quickly generating large profits for lots of companies in multiple industries, and was propelled to a whole other level thanks to the digital revolution.
Just as deregulation and the digital revolution gave birth to Yield Management, the current e-commerce climate is ripe for disruption and innovation. The COVID-19 outbreak accelerated the digitalization of many businesses and fundamentally changed shopping habits. These transformations call for a new approach at pricing. A good way to tackle this challenge is to step away from traditional models. Instead of relying on internal, economic indicators to decide on a price, businesses should aim to adopt a more customer-centric approach.
Most people agree that listening to your target audience is key to a company’s long term success; although price is almost never included in this process. What is the point of going through many layers of relevant factors to try to determine the perfect match between supply and demand when the latter remains a relatively unknown factor? What is wrong with simply asking customers what price they are willing to pay?
Of course, it’s impossible to accept every single price your clients are willing to pay; between ridiculously low offers, jealous customers and/or bad decisions, you need a safeguard to keep your strategy within reason. This is where the negotiation part begins.
Now let us get something out of the way first: negotiation is a loaded term that bring up negative preconceptions (laborious process, too time-consuming, …etc.). Although, once we get past these assumptions (some of which can be greatly mitigated as we will see later), we discover that, more often than not, this process can bring about a win-win outcome, creating tremendous value for both the seller and the buyer. Let us take a look, step by step, at what can make negotiation such a valuable tool for selling products and services online.
Personalized service and experience
One major transformation we identified earlier is the change in customer expectations, especially within the Millennial generation. Studies show that people born between the 1980s and 1990s, and this can stretch further, are much more receptive to personalization within the customer journey. They do not want to be treated as simply one amongst many clients of your store; you need to feel like their presence is especially valued.
Negotiation will make your clients feel a certain sense of uniqueness
When going through a negotiation process, your client will instantly feel like they are no ordinary customer. You have them under the impression that he is especially valuable for your business, so much so in fact that you are willing to adapt your pricing strategy at the level of the individual; you make an exception only for them. When agreeing on a negotiated rate, you send the strong message that your business understands every single one of its clients from the get-go.
By negotiating, you actually acknowledge every one of your potential clients’ needs and act accordingly; which manifest into a very important and valuable sense of uniqueness.
In psychology, a cognitive bias is recognized as a pattern of deviation from judgment due to individuals creating their own subjective reality. Simply put, it is when someone acts in a narrow-minded, non-rational way because of an experience that distorted his decision-making process.
This principle applies particularly well in our case. Indeed, once a user is engaged in the negotiation process, they feel a certain sense of commitment to your product/service. As he or she already put the time and effort to try and get a better deal, the user is less likely to drop his/her cart. This consistently translates into a better conversion rate for your business.
This is not unlike the principle of sunk costs fallacy in economics, which states that the more financially (in our case emotionally) invested you are in a project, the less likely you are to make good, rational decisions.
Reach unattainable targets
When establishing their pricing strategy, most companies, especially in the luxury sectors, are met with a major constraint, known as the risk of image. Indeed, even though you might want to sell some products at lower price, you cannot risk giving your brand a bad reputation by publicly displaying cheap rates. This situation can be depicted as follows:
Negotiation is a good way to go around this major problem. Indeed when going through this process, you’re not publicly jeopardizing your reputation as the deal you agree on is private, one to one (prices negotiated aren’t displayed). This means you can easily go under the market price line and agree on discounted prices as long as you stay above your marginal price (red). What better way to maximize your business’s revenue?
Barriers and solutions
As we saw previously, there are still a few obstacles to overcome before we can really agree on the efficiency of negotiation. First off, and most importantly, the human aspect. It’s hard to deny that some people just don’t like negotiation as it involves confrontation. Indeed, you have to be willing to disagree with someone, which is a difficult thing to do for a lot of people. Also, you might think, why would I lose time negotiating prices when I could be doing something else. Or you might just feel like you’re just not good at negotiating. These are all legitimate obstacles that one is bound to encounter when going through a negotiation process manually. But who said we can’t automatize it?
PrivateDeal solves every single one of these problems. As the first automated negotiation platform on the market, PrivateDeal let clients offer their own price for a product or a service before automatically negotiating with them the best compromise for both you and your client. By overcoming all of the aforementioned challenges, PrivateDeal lets companies reap all of the benefits of negotiation without lifting a finger.