Sticky prices: dynamic pricing’s opposite
The first association with the adjective “sticky” is usually connected to food (or sticky notes if you are a student), but yes, that’s right, prices can be sticky too. Sticky prices mean exactly what they sound like – they resist moving or changing. Since the eCommerce world revolves around dynamic prices, it’s clear that having sticky prices can seriously affect your business.
So, is there a way of making prices less sticky? Is price change really possible anytime you want it?
These and a few other questions will be answered in the lines below.
What are sticky prices?
Let’s cover the basics first.
Sticky prices refer to prices which not react (or are slow to react) to changes happening in the market. Those changes are usually connected to demand, supply, and costs.
While price stickiness is applicable with both lowering and raising prices, some goods/services are more likely to get sticky on their way up or down. Wages can be taken as a good example, known to everyone. Labor has a price and it’s defined based on the working hours, workload, workers’ qualifications, contribution to the company, and many other factors. But, what happens if you get a new team member? If we were to implement the principles of demand and supply, that would mean that there are now more inputs, thus, less workload. However, you don’t expect your payment to go lower, don’t you? 🙂 And it doesn’t happen because the wages are a typical example of price stickiness. Wages are expected to only go up, and rarely down (with the exception of special situations where the lowering is inlined with the company’s current financial situation).
Is it really true that you change the prices whenever you want?
We know that you expect a simple yes or no, but unfortunately, the situation can be very changeable, therefore, the answer will depend on many factors.
Looking from a purely cost-effective side, businesses should change the prices that bring insufficient results. But, in the case of some companies, that’s easier said than done.
- “Menu costs” can differ from industry to industry
Menu costs or the cost of changing/updating the prices are not the same for every business. For instance, it is obvious how much additional work and expenses this brings to restaurants. Brick-and-mortar stores are also faced with the same daunting work. However, contrary to popular belief, IT/SaaS companies don’t have it any easier either. It’s not just about updating the pricing section on the website – sometimes the whole pricing system needs to be updated which requires additional work for pricing consultants.
As you can see, besides the additional work, you need to be ready for some extra expenses.
- How will customers react to price changes?
Your team might have calculated how much profit would the new prices bring, but there is one more factor in the equation – customers. Customers love price changes only if they are benefiting from them. But in most other cases, they just find it confusing and annoying. That’s why even if there’s room for a price increase, companies remain reluctant to do it out of fear.
Now you may ask why would anyone then go for sticky prices if it seems that life is much easier with the dynamic ones. Well, price stickiness is not always a matter of choice. For example, this type of pricing will usually appear in the cases of long-term contracts. A company that has let’s say a 3 year-long contract with another company has the obligation to stick to the agreed price.
Sticky prices and eCommerce – the battle between price dynamics and price stickiness
eCommerce market, especially nowadays is extremely competitive. The fact that adds up to that competitiveness is the dynamic price change. More products mean more competitors which makes customers decide based on the best pricing option that is on the market.
Research done on this topic shows that sticky prices are costly. That’s not a surprise having in mind that sticky prices lead to a slower reaction time. While you’re deciding whether to change your sticky prices or not, other companies who are using dynamic prices have already done it.
The main issue with sticky prices is that it prevents you from testing out different pricing models and that’s what gives a comparative advantage to the companies who are relying on dynamic prices.
That’s why the eCommerce market is such a great environment for dynamic pricing. Of course, that customers don’t like prices changing all the time, but they also understand that, for example, seasonal price changes are necessary. Retailers have an advantage over brick-and-mortar stores because these price changes are just a click away. Undoubtedly, they also need to invest time and resources into defining new prices, but the whole implementation process is a lot easier and faster.
On the other hand, this can easily become a cat and mouse game. With the popularity of big players such as Amazon who are setting the trends in the eCommerce industry by changing the prices every few minutes, it’s very hard to resist falling into that trap. Not every business needs such frequent price changes. That’s why a price monitoring tool is always a good option if you don’t only want to keep up with the competitors’ prices, but also adjust yours when possible.
Price stickiness examples
We already mentioned wages as an example of price stickiness that is highly unlikely to decrease. That’s why wages are a good example of downward sticky pricing. Another good example of price stickiness is the iPhone. Even if the demand for the last couple of years continued to fall, Apple has not reduced the price until the next model, iPhone 11 got available on the market. They keep the same trend for every new model.
Did you know that Coca-Cola has not updated the prices for 70 years? The reason behind this? Believe it or not, but vending machines. Most of the vending machines could only accept nickels, so if Coca-Cola wanted to enable the machines to take dimes it would increase the price of a bottle. Since they have feared the customers’ reaction, the most popular beverage in the whole world kept its prices the same for more than half of a century!
All these examples are based on two types of sticky pricing models: downward sticky pricing and upward sticky pricing.
Downward sticky pricing means that the prices have the tendency to resist getting lower even if the market conditions would suggest so. Thus, the prices remain artificially higher which leads to excess supply.
Upward sticky pricing works the other way around. Even if the market changes suggest that the prices should go up, they remain artificially lower causing excess demand.
OK, so far you have understood that having sticky prices is not the smartest option (unless is a necessity) but is there a way of making the prices less sticky?
How to make your prices less sticky to maximize revenue?
The less sticky the prices are, the more chances to get a bigger revenue – that’s seems pretty clear. But how to do it?
- Understand your costs
In order to increase or decrease your prices, you first need to know what are the components of that price. It’s crucial to know where your costs are coming from. For example, if there is a great shift in the input cost, you’ll know exactly where that cost is coming from and what effects will it have. This is where the whole power of different pricing strategies is shown. Being able to fluctuate among different market conditions and adapt easily is not possible without a dynamic pricing strategy.
- Know your customers
All this talking is completely useless if you don’t know your customers’ willingness to pay. In order to know it, you must gather enough data. Regardless if your gonna change the prices right now, or sometime in the future, you simply must follow this crucial pricing rule. It will allow you to know when and where exactly you can push the price. This will be much smoother if done by a professional – a price monitoring tool. You’ll be able to follow customers’ reactions in real-time which will give you some answers right away.
Sticky prices can endanger your business, especially an eCommerce one. Time is money, and if you don’t have a timely reaction to the market changes, the opportunity has already been wasted. So, why miss the chance of increasing your profit? If your competitors are frequently changing their prices, why wouldn’t you do it too?
We always suggest knowing your customers and having in mind their best interest, but if you’re prolonging the inevitable business decisions, you’re just setting yourself for failure. By trying not to annoy them with price changes, you might end up alienating them. At some point, your prices can become too high, and the competitors will simply turn to a more affordable option.
You have the power to prevent this and maximize your revenue!
What are your thoughts about sticky prices? Is your business using them, or have you found a way out? We would love to read more about it!