Why is everything so expensive? Blame dynamic pricing. Oh, sure, you can blame other factors, like inflation and supply chain problems, but if the high price is the victim of murder, the dynamic price will be rounded up as one of the top suspects.
What is Dynamic Pricing?
Dynamic pricing is a pricing and profit strategy used by businesses to sell to different groups of people, a tactic related to supply and demand, with a lot of emphasis on demand.
Or put another way, “Dynamic pricing is a computer algorithm that balances supply and demand in response to what people are willing to pay,” says Andrea Luoma, who runs the entertainment management program at the University of Montana College of Business.
“It’s a buy early and save concept,” he said. “And dynamic pricing is really no different than discounts for seniors, students, and military members. If there’s no demand, then the price will drop.
What’s increasingly different is how often dynamic pricing is used – and it’s changing the way we spend money across many industries.
Dynamic pricing and Restaurant
Restaurants have been doing dynamic pricing for decades. Happy hours in bars are a form of dynamic pricing – letting customers know that if they come at a less crowded and demanding time, they will be rewarded with a cheaper drink. If you’ve ever taken your kids to a restaurant on a quiet Tuesday night because that’s when the restaurant has a “kids eat free” program, that’s an example of dynamic pricing. For the most part, restaurants don’t do all the dynamic pricing on their menus. For example, Subway had a $5 foot long deal a few years ago. No matter what time of day, you can go to Subway and get $5 foot long.
But such prices may eventually become a relic of the past. According to publications like RestaurantBusinessOnline.com, many restaurant chains are now debating whether to use dynamic pricing on a more regular basis, thanks to the growing popularity of the digital menu industry. Prices on digital menus, after all, can be changed instantly and easily, making the perfect dynamic pricing recipe. Eventually, it may be common for restaurants to raise or lower prices by the hour or minute, depending on how crowded the establishment is.
However, don’t assume that before too long, if you walk into a crowded restaurant during the day, the price of your burger will increase by $2. The technology is there – and has been for a while, but businesses are often reluctant to use it.
“Dynamic pricing is really difficult because when people find out they’re being charged more than others, it’s understandable to get upset,” said John Dinsmore, a marketing professor at Wright State University in Dayton, Ohio, who has conducted research on pricing.
“A famous example of early dynamic pricing was the beverage vending machine that charged people more when it was hotter outside. People felt exploited and angry,” said Dinsmore, referring to Coca-Cola’s experiment in the late 1990s. They eventually ditched the idea, due to the onslaught of criticism the beverage company received.
Dynamic Prices in Concerts and Other Forms of Entertainment
Luoma said dynamic pricing does not necessarily mean higher prices.
Most shows don’t sell out, and often the prices are drastically reduced,” Luoma said.
So if you don’t think the event you’re interested in will sell out, it might pay to hold off on buying your concert or theater tickets right away. It’s a risk, but it’s a strategy that some people use cheap sports tickets and see other events. Luoma added, “Don’t blame the artists for the more expensive tickets because they rarely get an increase in revenue from dynamic pricing. They actually make money from merchandise sold at live shows.
Dynamic pricing in Parking
It can be quite hard to find a parking place sometimes, but having to pay more for that is just kind money stress and worry when you don’t need it. City parking lots often raise prices when there are concerts in town or sporting events. And parking meters sometimes raise prices, too, according to Shelle Santana, an assistant professor of marketing at Bentley University in Waltham, Massachusetts.
“In some cities, the cost of parking meters changes dynamically based on the number of cars trying to park. When demand is high, prices are higher, and when demand is low, they are lower,” he said.
Dynamic Pricing in Online Shopping
“You see dynamic pricing popping up everywhere these days, but especially in online retail,” Dinsmore said. This, too, is not surprising that an online business can adjust its price on the fly, but Dinsmore points out that online retailers often use dynamic pricing methods on individual customers. That is, the price will adjust not only depending on the time of year and customer demand but also based on your own interest in the brand. If you buy a lot from a brand, some online companies will do what they can to make sure you keep buying.
“I think the more widespread uses of dynamic pricing are discounts, sales, and coupons. You’ve seen this with your grocer sending out special coupons every month featuring products you know you buy,” Dinsmore said.
He said online retailers are adapting similar tactics, many of which are centralized consumer psychology.
“For example, if you sell a $50 product, some customers may respond to a ‘$5 off’ coupon while others may prefer a ‘10% off’ coupon. It’s the same discount, but people respond differently. Over time, your company will have click data to know the word -the exact words, phrases and images that will make you click,” says Dinsmore.
Dynamic Pricing in Brick and Mortar Stores
You can even find price disparities in retail chains – in the same community. “The Daily Texas,” the University of Texas newspaper, recently reported on Target’s “dynamic pricing” at campus stores. The article cited a freshman student who discovered that the seven items in her cart would have been a little cheaper – $4.30 less – if she had shopped at Target just 3 miles away.
If you realize you’re paying more at a larger store, you can get out of paying the higher price if the store offers a price match, like Target. Still, as a consumer, it can rub you the wrong way. That’s a dynamic pricing risk, says Kimberlee Josephson, associate professor of business administration at Lebanon Valley College in Annville, Pennsylvania.
“When done poorly, dynamic pricing can tarnish the reputation of a firm and the valuation of a brand – especially if customers feel they have been taken advantage of,” says Josephson.
What You Can Do About Dynamic Pricing
“Dynamic pricing is intended to influence consumer behavior. However, it does not eliminate consumer power. At the end of the day, it is still up to the consumer to accept or reject the offer,” said Josephson.
But the way businesses today price their merchandise and services makes it even more important to be a smart shopper. Life is too expensive if you don’t compare shops and hunt for the best bargains, so you can live well for a while cheap life. Meanwhile, if you are one on a fixed income as a retiree, dynamic pricing can be a serious economic threat. But all is not in vain. Josephson emphasized that no one is powerless against dynamic pricing.
“The consumer still has the upper hand,” he says. “Even if consumers want a better price, producers have to make sales.”
Still, for good or bad, dynamic pricing is not going to be eliminated – it is too profitable for companies to abandon it. “The reality is people will pay if they want it bad enough,” Luoma said.