Dynamic pricing for small businesses

I had my hair cut the other day. Well, cut is a misnomer – it’s more of a quarterly buzz with a #2 blade. Anyway, I walked into my usual joint (can’t quite call it a salon) at noon on a Wednesday and it was completely empty, barring the three ladies waiting for a client to show up. Quite a contrast from my previous visit, where I’d had to wait half an hour before someone was available to do the honours. Both times, my ten minutes in the chair cost me $9 plus the couple of extra that I throw in. 

It doesn’t make a lot of sense when you think about it. My barber shop is inadvertently operating in a beautifully inefficient closed market that ignores available information and eschews any fundamental principle of supply and demand. 

What they should be striving to achieve is a state of equilibrium in which the hairdressers are never waiting for a client, and the clients are never waiting for a hairdresser. Optimal efficiency all around, and importantly from the perspective of the business, no perishable inventory goes to waste.

They can of course get a little closer to that scenario by being a bit more refined about adjusting the supply, but the reality is that there are limits to how far you can go. Just as an airline can’t swap out all its 747’s for a fleet of 737’s on a slow day and then switch back again the next morning, a hair salon can’t adjust its labour force in anything more than fairly broad strokes.

However the lesson that can be learned from the airlines, amongst others, is the power of pricing in influencing demand. Just as the person in the last row middle seat on a flight from San Francisco to New York can have paid $500 more than the person in the exit row aisle seat, it stands to reason that no two haircuts have to be priced the same. 

Certainly you’d have to wage a battle against the long-term conditioning that consumers have undergone. Ultimately though, if my hair place could bring in a few more people with $7 haircuts on Wednesday at lunchtime, and also charge $15 on Saturday afternoons without having to deal with an empty slot, then that’s precisely what it should be doing. 

Now the owner of the place is never going to do this. (S)he has his/her hands full just keeping the place running seven days a week. Analysing data on a continuous basis to determine how much to charge for each haircut isn’t going to happen. And the pricing is just half the battle – arguably more important is finding a way to get that information in front of the people who are making the decision on whether or not to get their haircut, and when to do so. The flow of information is what enables an efficient market to actually exist.

It’s for this reason that I’m excited about where companies like Booker and MyTime are headed. There’s a long way to go, but I believe that these are the sort of edges that small businesses are going to need to stay competitive in the long run. The days of just buying an ad, be it in the yellow pages or elsewhere, and hoping that things work out, are gone. The tools and services needed are going to have to be provided by third parties who can optimize both for an individual business and ultimately for a geography and/or industry as well. It will be interesting to see how the big guys come to the table.

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