Is Dynamic Pricing Worth the Angry Customers?

Let’s talk about dynamic pricing. You either love it or hate it depending on whether you’ve got your entrepreneur hat on or your consumer hat on.

It’s become a hot topic with the mainstreaming of technology that tracks our movements, our orders, and then changes prices once a certain trigger is met. So if you think it’s complicated — it isn’t.

Maybe you think it’s something new. It isn’t. You’ve been paying dynamic prices for decades; airline tickets, hotels, Uber rides and more. That’s dynamic pricing, my friend.

Think about it? When was the last time you’ve seen prices printed on something? They’re out there, but tons of businesses have their prices online or on a screen and that means they can change those prices on a dime. (See what I did there?)

The real question is, should you use dynamic pricing to price your products just because you can?

What Is Dynamic Pricing?

Let’s put it this way, dynamic pricing is like playing the stock market for products and services. Basically it means that there’s a price range instead of a fixed price for a product or service depending on a variety of factors.

It offers flexibility over fixed prices. That means that businesses adjust prices based on factors like demand, competition, and even the time of day. This pricing method allows for optimizing revenue and profits by charging what the market will bear at any given moment.

But, this pricing model is a double-edged sword for both companies and consumers. This won’t surprise you, but businesses usually end up on the winning side of this equation, while consumers will often get stuck paying a much higher price because

Examples of Dynamic Pricing

Think back to that expensive Uber ride. You likely paid a premium due to high demand, allowing Uber to increase its prices. The same logic applies to airlines. As holidays approach, airfare costs surge because people are willing to pay more to travel during peak seasons.

This dynamic pricing strategy is common. According to eMarketer, 35% of retail sales are projected to occur on online marketplaces by 2027 — platforms like Amazon Marketplace, that use this pricing model. In 2022, airfare prices even jumped by 20% over Labor Day weekend.

Dynamic Pricing Is More Common Than You Think

The concept of dynamic pricing has been around for a while. However, this model gained traction in the 1980s when the airline industry began experimenting with it after government pricing regulations were loosened.

E-commerce retailers, such as Amazon, Walmart, and Best Buy, also commonly use it. They use sophisticated algorithms that monitor data sources like competitor prices, customer behavior, stock levels, and market trends to adjust their pricing strategies constantly. Tools like Price2Spy are becoming widely used.

How Does Dynamic Pricing Work?

Dynamic pricing relies on data analysis and algorithms. Businesses consider numerous factors before adjusting prices, from the time of day to more complex metrics like demand elasticity, conversion rates, and competitor pricing.

Then, specialized dynamic pricing software analyzes this data to determine the optimal price points for different products.

McDonald’s and Burger King, Starbucks and Taco Bell, have been using dynamic pricing in a more subtle way. They often employ digital menu boards and app-based incentives to offer discounts and promotions during less busy times. This approach allows them to adjust prices without explicitly raising them during high-demand periods

When the word got out that Wendy’s was going to add dynamic pricing — the internet went nuts.

Is Dynamic Pricing Fair?

The fairness of dynamic pricing is subjective. Some businesses view it as a way to balance supply and demand while maximizing revenue.

If demand is high, a higher price reflects that. If people are willing to pay, it suggests the price is fair, simply responding to market dynamics.

However, critics consider it price discrimination, potentially violating the Robinson-Patman Act of 1936, which prohibits offering different prices to different buyers for the same product.

While customers do have the option of saving money, right now, they aren’t really seeing it that way.

Customer Perceptions & Impact on Consumer Trust

Dynamic pricing can confuse shoppers accustomed to fixed pricing. This model has sparked controversies, and businesses must handle these mixed customer perceptions carefully.

Initially, dynamic pricing generated negative publicity, like when Uber charged high prices during peak hours, outraging customers.

Now, there are articles out there, like this one from Wharton, that’s trying to sell consumers on the many benefits of surge pricing (like Uber practices), I’m going to call BS on that one. Because they are forgetting something that middle class consumers and small business owners have been dealing with for more than a decade.

Prices of everything have been increasing year over year, and while the inflation RATE has slowed down, prices continue to stay high while consumer (and entrepreneur) income has remained flat. And that means that money is tight for 99% of buyers.

In other words, if you’re a small business owner considering eeking out a few more profit dollars, I’d encourage you to tread carefully.

Strategies to Implement Dynamic Pricing Successfully

So let’s say you want to give this a shot. After all, a 1% price increase goes straight to your bottom line, so if there is even a prayer of adding a little more profit — should you?

Like all things marketing, you better have done your research. Start with understanding your customers. Understand their pain points, and what they are currently spending for the same desired outcome that you’re selling.

If you’re going to try dynamic pricing — you better do your homework — your math homework, that is. Think of it as a push and pull between profit maximization with customer satisfaction.

Let’s face it — you have to be transparent about this. And, again, don’t launch something unless you are more than 80% sure that you know exactly how your customers are going to react. Companies should clearly communicate pricing fluctuations on their website and during the purchase process. Explanations like, “Our prices vary based on demand, ensuring sufficient product availability,” can be helpful.

Businesses should consider offering price comparisons to show customers they’re getting a fair deal. Providing incentives and rewards, such as loyalty programs and advance-purchase discounts, helps offset the impact of dynamic pricing and strengthens brand loyalty.

Target Pricing & Specific Market Segments

Lufthansa Group uses continuous pricing to implement dynamic pricing. One approach is using a value-based pricing structure that segments pricing by location or purchase behavior. Airlines, for instance, segment customers into business and leisure travelers.

Business travelers are more likely to book last-minute tickets and accept higher prices. Airlines tailor their prices by adjusting the number of price points available in different fare classes based on reservation booking designators. This system is outlined here.

By charging lower prices for bookings made in advance and raising them for last-minute bookings, the goal is to improve revenue management. It attracts travelers who are less sensitive to fluctuating prices and reduces reliance on business travelers during economic downturns.

Pros and Cons of Dynamic Pricing

Dynamic pricing has advantages and disadvantages. Businesses must understand both sides before implementing it.

Pros: Benefits for Businesses

Cons: The Drawbacks of This Pricing Model

Dynamic pricing also has its drawbacks.

FAQs about Dynamic Pricing What is dynamic pricing and what is an example of it?

Dynamic pricing means prices can fluctuate based on market conditions or demand. Prices don’t remain fixed but change in response to market trends. Businesses use it to fine-tune their pricing strategies flexibly.

For example, Uber ride prices often surge during bad weather or Friday night happy hours, demonstrating dynamic pricing in action.

Is this pricing strategy good or bad for the buyer?

Dynamic pricing has pros and cons for buyers. Savvy shoppers can find bargains during periods of low demand, saving money.

However, price-insensitive shoppers risk paying more for items in high demand. For example, if it’s a sweltering day, home improvement stores might raise fan prices, capitalizing on people’s willingness to spend.

What determines if dynamic pricing is illegal?

In many situations, dynamic pricing is legal, although it might not be popular with all customers. The Robinson-Patman Act of 1936 prohibits price discrimination.

Dynamic pricing strategies often leverage loopholes to adjust prices legally. However, selling gas at significantly higher prices during natural disasters might be considered price gouging, subject to different regulations.

Public sentiment plays a significant role in today’s world. Social media backlash against perceived price gouging can lead to investigations and potential prosecution, even if no technical price discrimination occurred.

What’s the difference between dynamic pricing and “price gouging?”

Dynamic pricing and price gouging share similarities, often involving price increases due to high demand, which can feel like gouging to some. It can be argued that these price adjustments are supply and demand-driven.

Price gouging, however, refers to excessively inflating the prices of essential goods, like groceries, gasoline, or emergency supplies, typically after disasters or emergencies when these items become scarce and consumers are desperate.

For instance, gas stations charging exorbitantly high prices during Hurricane Harvey’s aftermath were engaging in price gouging. States like Texas and Louisiana have laws against price gouging to prevent such practices.

Explain what “dynamic pricing” actually means.

Dynamic pricing allows product or service prices to adapt based on market changes. It’s data-driven, using algorithms to find optimal prices and adjust as needed. Real-time market information is used to determine the balance between high demand and acceptable prices.

For example, airline tickets go up during peak seasons, and concert tickets can skyrocket due to high demand and limited availability. Dynamic pricing benefits savvy shoppers who purchase during slower periods, but others may find it exploitative.

Conclusion

Dynamic pricing is a powerful strategy in today’s digital market. Businesses must understand its complexities, considering the potential for profit maximization and the risks of damaging brand reputation and customer trust. By implementing dynamic pricing strategically and transparently, businesses can optimize their pricing strategies while maintaining positive customer relationships.

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