Dynamic pricing is the name given to a pricing strategy in which businesses sell their products or services at prices that vary according to a range of market conditions.
In its most sophisticated form prices are determined by algorithms that compute a number of variables such as seasonal variations in supply and demand, competitor pricing, variations in costs, etc.
Dynamic pricing has become common practice in several industries such as hospitality, entertainment, and transport.
As we all know, airlines normally set their prices according to the number of seats still available on the flight, as well as the day and time of the flight. So a seat that has been booked at the last minute on a flight that is scheduled to leave an airport on a Friday afternoon, could easily cost 4 or 5 times as much as a seat that has been booked months in advance on a plane (operated by the same airline) that flies the same route on a Wednesday at mid-day.
Is dynamic pricing a model that the private language teaching industry should consider adopting?
To a limited extent, it has always happened. Many schools offer ‘early bird discounts’ to encourage students to register for a course before a certain date. The advantage of this sort of approach, very clearly, is that if schools can encourage students to enrol well in advance, they will find it easier to plan staffing levels, and school directors will also be able to sleep more easily, knowing that they have a least a proportion of their overhead costs covered months in advance.
Similarly, schools frequently offer discounts to those students that register for longer periods. So the cost per week of a 24-week intensive course, is likely to be significantly lower than the cost per week of the same intensive course paid by a student who has only registered for 4 weeks (for example).
Schools that recruit students through external agencies may also vary their commission rates according to the time of year. In normal circumstances, schools may choose to offer higher commission in low season, then reduce it in their peak periods when they can be confident that they will be able to fill their premises without having to pay quite so much to recruiters.
But is there potential in our industry for a more sophisticated dynamic pricing strategy? One that would take into account a range of external factors such as direct competitor pricing, seasonal demand, length of stay, and perhaps even the level or age of the students?
Leaving aside the cost and complexity of contracting a reliable software company capable of developing a suitable algorithm, what might the other impediments be?
Let’s consider how students might react if they discovered that they were paying more than their classmates for the same service. Would they be upset? Could such differences be justified?
Airlines and hotels don’t have to worry too much about this sort of thing for two main reasons. Firstly their customers understand that this is the established way of pricing this type of service; secondly, customers are unlikely to spend enough time in each other’s company to discuss the prices they have paid, then become irate if they discover that they have paid over the odds.
Needless to say language schools specialising in younger learners wouldn’t have to worry too much about their students discussing prices either, as the students themselves are almost certainly blissfully unaware of how much their parents have paid for their course. Encounters involving the parents could also be few and far between, if they happen at all.
On the other hand, adult students in a language school may spend weeks or even months with the same group of people and it is entirely conceivable that the cost of their course (and accommodation, if provided) surfaces at some point, perhaps when students are asked to evaluate the services they have paid for.
Does this matter? Perhaps not enough for it to be a major concern. In their defence, schools could always argue that students who book their course well in advance are eligible for a lower price, as are students who book for longer periods of study. Most students would probably understand and accept this sort of argument.
But would a sophisticated dynamic pricing model be in the school’s best interests? Possibly. Let’s do some simple sums to see how it might work.
For the sake of argument, let’s assume that the pre-dynamic price of a 4 week intensive course is € 1,000 and that the school can normally expect to recruit 10 students to take such a course. So the pre-dynamic price income is € 10,000, on average.
Let’s also assume that the algorithm determines that prices should start at € 850 (to be competitive) and will increase by € 50 every time 2 students books a course. In other words, as demand increases, so do prices. That would give us a dynamic pricing policy that looks like this:
€ 850 x 2
€ 900 x 2
€ 950 x 2
€ 1,000 x 2
€ 1,050 x 2
€ 1,100 x 2
And so on.
With this model, if the same number of students join the group (10) income falls to €9,500. But if one extra student joins, then income increases to € 10,600. And if two additional students join, income goes up to € 11,700.
In this particular example, the two additional students needed to raise total income would be paying more than they would have paid with the old, non-dynamic model (€ 1,100 instead of € 1,000) so they’d have to be pretty convinced that this is the course for them; or else not too bothered about the cost of their course.
The benefit, clearly, is for the 6 students who registered when the price was below the previous non-dynamic fee.
The benefit to the school is also clear, so long as the dynamic pricing system helps them recruit more students.
But might there be other, less complicated ways that schools could achieve this same outcome?
Like this:
Like Loading...