Dynamic Pricing Platform (1/5)
Introduction
This is the first article of the five article series on Dynamic Pricing Platform (revMax) of redBus. Aim of the articles will be to give technical overview of the underlying architecture. But before we start with the technical details, let’s look at the problems that needs to be addressed by the new architecture. If you are reader who has travelled at different times and same locations via the flights, it is highly likely that you have paid different prices. In short for a end consumer this is dynamic pricing. There are various purpose for which the pricing is done differently and dynamically. Let’s look at the broad category of pricings.
Differential Pricing
As per general accepted definition, the Differential Pricing is the process of pricing the same product at different rates for different customers. At a glance it may appear to be non-homogeneous way for treating customers. However in theory this works. This can be observed in day to day life as well. Consider booking a flight ticket from “Gorakhpur” to “Bengaluru”, and let’s go to Indigo Airlines website. What you may see as options are specific check boxes for “Army Personnel” and “Senior Citizens”, now here the airline is going to offer same seats at different prices to the general age group and senior citizens.
This was an example that is clearly available to observe. With evolution in e-commerce and various data collections, it is now possible to show different prices of same product to different customers, based on their affinity to buy. Process to execute may vary from domain to domain. As far as the Bus travel domain is concerned, many RTCs offer the seats at different prices to the senior citizens.
Dynamic Pricing
Dynamic pricing corresponds to the process of pricing same product differently and different times. Taking the example for Gorakhpur to Bengaluru flights from Indigo, one can observe two things for same flight one can observe different prices at different times. Second, observation will be, for same flight the prices that is observed today is going to be different on other future dates. The question, probably is not why the prices are different but, how can they be predictably set, such a way that the airlines are able to still sell the tickets, and manage to stay competitive. The question will be answered in the subsequent chapters.
And the word of caution, although dynamic pricing can seem to be very profitable as long as customers do not anticipate price decreases and delay their purchases, the situation is more challenging when customers choose to behave strategically and delay their purchases to wait for lower prices. In reality, the dynamic pricing problem is more complicated because demand is unpredictable and customers behave strategically in that they may decide to delay their purchases if they know that prices will drop over time.
Dynamic pricing can be a powerful tool to increase profits if the customer’s sensitivity to price changes in the course of the season. This is often the case for fashion products, for which customers are less price sensitive early in the season, but become more price sensitive towards the end of season. Dynamic pricing should however, carefully consider strategic behavior by customers who may anticipate future price drops and delay their purchases. With strategic customers it is better to have fixed price or reduce the quantity offered.
Next Chapter
As it may be clear that the dynamic pricing is amazing concept. Next chapter will cover the existing solutions for revenue management and a simulation of Littlewood’s rule and how a popular heuristics Expected Marginal Seat Revenue aka EMSR extends this to generalized form.
Chapter 2: Littlewood’s rule and EMSR
Chapter 3: Technical Architecture
Chapter 4: Details & Reasoning
References:
Supply Chain Management, Strategy, Planning and Operation by Sunil Chopra, Peter Meindl, Dharam Vir Kalra
