Why is everything so expensive? Blame dynamic pricing. Oh sure, you can blame other factors, like inflation and supply chain issues, but if high prices were a murder victim, dynamic pricing would be considered one of the main suspects.
What is dynamic pricing?
Dynamic pricing is a pricing and profit strategy that companies use to sell to different groups of people, a supply and demand tactic that puts a lot of emphasis on demand.
Simply put, “dynamic pricing is a computer algorithm that balances supply and demand in response to what people are willing to pay,” says Andrea Luoma, who directs the entertainment management program at the University of Montana College of Business.
“It’s the concept of buying ahead and saving,” she says. “And dynamic pricing really isn’t much different than discounts for seniors, students, and military. If there is no demand, prices will go down.
What’s increasingly different is how often dynamic pricing is used – and it’s changing the way we spend money in many industries.
Dynamic pricing and restaurants
Restaurants have practiced dynamic pricing for decades. Happy hours at bars are a form of dynamic pricing – letting customers know that if they come in during a less crowded and less demanding time, they’ll be rewarded with cheaper drinks. If you’ve ever taken your child to a restaurant on a quiet Tuesday night because that’s when the restaurant offers a “kids eat free” program, that’s an example of dynamic pricing. For the most part, restaurants haven’t done a lot of dynamic pricing on their menus. For example, Subway had this $5 deal years ago. No matter what time of day you can step into a subway and get a $5 length.
But this type of pricing may possibly be a relic of the past. According to publications like RestaurantBusinessOnline.com, many restaurant chains are currently debating whether to use dynamic pricing on a more regular basis, thanks to the growing popularity in the industry of digital menus. Digital menu prices, after all, can be changed instantly and easily, making it the perfect dynamic pricing recipe. Eventually, it could become common for restaurants to raise or lower prices by the hour or by the minute, depending on how busy the establishment is.
However, don’t assume that before too long, if you walk into a crowded restaurant at lunchtime, the price of your burger will go up by $2. The technology is there – and has been around for a while, but companies are often reluctant to use it.
“Dynamic pricing is really tricky because when people find out they’re being charged more than someone else, they naturally get upset,” says John Dinsmore, professor of marketing at Wright State University in Dayton, Ohio. , who researched pricing.
“A famous example of early dynamic pricing was a beverage vending machine that charged people more when it was warmer outside. People felt taken advantage of and were furious,” Dinsmore says, referring to an experience of Coca-Cola in the late 1990s. They eventually scrapped the idea, due to the onslaught of criticism the company received from drinks.
Dynamic pricing in concerts and other forms of entertainment
Luoma says dynamic pricing doesn’t always mean higher prices.
Most events don’t sell out, and often their prices are significantly discounted,” says Luoma.
So if you think an event of interest won’t be sold out, it might be beneficial to delay buying your concert or theater tickets right away. It’s a risk, but it’s a strategy some people use to get cheap sports tickets and see other events. Luoma adds, “Don’t blame artists for more expensive tickets because they rarely receive the revenue boost from dynamic pricing. They actually earn their money on the merchandise sold at the live event.
Dynamic pricing in the parking lot
Sometimes it can be hard enough to find a parking spot, but having to pay extra is the kind of financial stress and anxiety you don’t need. City parking lots often raise prices when there is a concert in town or a sporting event. And parking meters sometimes raise their prices too, according to Shelle Santana, assistant professor of marketing at Bentley University in Waltham, Massachusetts.
“In some cities, parking meter fees change dynamically based on the number of cars trying to park. When demand is high, prices are higher and when demand is low, prices are lower,” she says.
Dynamic pricing in online shopping
“You see dynamic pricing popping up everywhere now, but especially in online retail,” Dinsmore says. It’s also not surprising that an online business can adjust its prices on the fly, but Dinsmore points out that online retailers often use dynamic pricing methods for individual consumers. In other words, prices will not only adjust based 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 everything they can to make sure you keep buying.
“I think a more widespread use of dynamic pricing is for discounts, sales, and coupons. You already see this with your grocer sending you personalized coupons every month with products they know you’re buying,” says Dinsmore.
He says online retailers are adapting similar tactics, largely centered on consumer psychology.
“For example, if you’re selling a product for $50, some customers may respond to a $5 off coupon while others prefer a 10% off coupon. It’s the same discount, but people respond Over time, your business will have the click data to know the exact words, phrases, and images that will get you to click,” Dinsmore says.
Dynamic pricing in physical stores
You may even find price disparities in a retail chain – in the same community. “The Daily Texas,” the University of Texas newspaper, recently reported on Target’s “dynamic pricing” at a store on campus. The article quoted a freshman who found that seven items in her shopping cart would have been a bit cheaper – $4.30 less – if she had shopped at a Target just 3 miles away.
If you find you’re paying more at a more crowded store, you can avoid paying that higher price if the store offers price matching, like Target does. Yet, as a consumer, it can rub you the wrong way. That’s 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 a company’s reputation and brand equity, especially if a customer feels they’ve been taken advantage of,” Josephson says.
What you can do about dynamic pricing
“Dynamic pricing aims to influence consumer behavior. However, this does not take away the power of the consumer. Ultimately, it’s always up to the consumer to accept or reject the offer,” says Josephson.
But the way companies now price their goods and services makes it even more important to be an informed buyer. Life is too expensive not to shop around and seek out the best deals, so you can live well while living cheaply. Meanwhile, if you’re on a fixed income as a retiree, dynamic pricing can pose a serious economic threat. But all is not in vain. Josephson insists that no one is powerless against dynamic pricing.
“The consumer always has the upper hand,” she says. “While consumers might want a better price, producers have to make the sale.”
Yet, for better or worse, dynamic pricing isn’t going away — it’s too profitable for businesses to give up. “The reality is that people will pay if they really want to,” Luoma says.
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