Art of Dynamic Pricing, Surge Pricing, Demand Pricing– It’s About Pick or Be Picked: Match Price-to-Demand…

Welcome to the world of dynamic pricing… According to Mike Fridgen; it used to be about ‘where’ to buy to get a good price, now it’s about ‘when’ to buy to get the best price… for many consumers and business– fixed price is a thing of the past; today consumers are faced with prices changing minute-by-minute…

Dynamic pricing, or real-time pricing, or surge pricing, or demand pricing… are flexible price schemes for when business decides to nudge prices up-or-down, on the fly, in response to specific market demand… Typically changes are controlled by pricing ‘bots’, which are software agents that gather data and use algorithms to adjust pricing according to a retailer’s specific business rules…

Where business rules take into account things such as; customer location, time of day, day of the week, level of demand, notable events, competitor pricing… Through collection, analysis of data about customer behavior, vendors make informed guess-estimates on price that customers might be willing to pay then price is adjusted, in real-time, accordingly…

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Dynamic pricing is a common practice in e-commerce in markets, such as; hospitality, travel, entertainment, retail… Retailers and online retailers in particular, adjust prices according to competitors, time, traffic, conversion rates, and sales goals, e.g.; hotels based on demand can generate more revenue by bringing in customers at different price points… or, airlines adjust prices depending on– day of week, time of day, number of days before flight… or, entertainment events adjust prices based on the level of ticket sales…

Triggers for dynamic pricing are often based on, e.g.; competitors prices– adjust prices up-or-down… or, demand is low– adjust prices lower… or, demand is high– adjust prices higher… Dynamic pricing is legal, as long as discrimination isn’t based on federally protected factors, e.g.; age, gender, race… It’s safe to assume most major online retailers are engaging in some form of dynamic pricing

In the article Magic of Dynamic Pricing by Seth Godin writes: When you produce physical goods, such as; a book, it’s really hard to change the price over time, especially if there are retail stores involved, but changing the price on electronic goods is trivially easy… So, for example, you could charge $24 for the Kindle edition for the first two weeks, then $15 for the next two weeks and then $9 for the year after that. Once it’s a back-list classic, it could cost $2… Or, thinking about how you might create launch excitement, you could reverse it, e.g.; $2-first day, $5-first week, then $9 later…

Better hurry! Or, to get more sophisticated, you could reward the market for getting excited. But, what if the price for everyone drops, if enough people pre-order it? This isn’t just about books, of course. It’s about anything where you have the ability to change pricing based on– time or demand… with tolls, music, phone calls, consulting… Technology puts a lot more pressure on your imagination and creativity, even in pricing…

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In the article Paying Higher Prices While Shopping Online by guestauthor writes: Dynamic pricing, or commonly referred to as time-based pricing, is a type of price discrimination that companies use to change prices, on the fly, based on circumstances and estimated user demand… With modern web browsers, websites have the ability to collect all kinds of information about you and your online behavior by using tracking cookies and other tools.

Using collected data, companies can then make guesses about how much more willing you might be to pay for the same item or service, and adjust prices accordingly in real-time… The fact that demand increases ‘value’ is a time-tested market sentiment… Hence, the question: when is dynamic pricing an effective tool for the retailer and when is it counter-productive? Consider the following:

  • When Dynamic Pricing Makes Sense: There are times when dynamic pricing makes sense. You may experience this first hand while booking airline tickets during the peak travel season (i.e. increased demand) or paying additional fees for rush orders (i.e. buyer needs it fast and is charged more). Dynamic pricing is widely accepted in the banking industry as well, e.g.; rates and fees changing based on bank balances, credit ratings…
  • When Dynamic Pricing Stinks: Most major retailers are engaging in dynamic pricing online, even though they know you hate it. They quietly change prices from one visit to the next based on your behavior during the previous visit, e.g.; if you look at an item a second time, the site assumes you have a greater desire for the product and increases the price; they hope that you, like most consumers, don’t have the time to shop around…

In the article Dynamic Pricing Matches Rates With Demand by Jason Q. Freed writes: In a study examining retail prices, researchers looked at the price of a single microwave oven on three different online channels– Amazon.com, BestBuy.com, Sears.com… In a 12-hour period, the price of the microwave fluctuated about $75: Sears did not alter the price… Best Buy changed the price twice over the time period… Amazon changed the price nine times…

These fluctuations are result of trends in real-time pricing schemes being used across many industries, it’s called dynamic pricing. Dynamic pricing is defined as; time-based pricing that matches goods, services based on ‘time’… According to Vishwas Bhatia; prices are often altered to meet real-time demand… Dynamic pricing is fluid, changes base on ‘demand’ reflecting true market value at that ‘time’…

Industries that are adopting dynamic pricing as a key part of their sales models include; airlines, theaters, cinemas, sports teams, hotels… Dynamic pricing simplifies the pricing process, e.g., it allows hotels to make changes instantly while maintaining rate parity… According to Cynthia Paynter; dynamic pricing practices attempts to– match rates with demand… it’s an opportunity to increase or decrease (average daily rate) with changes in market demand…

Often dynamic pricing is equated with discounting, but it’s not– it’s more of an attempt to provide ‘fair’ pricing based on demand, and possibly other factors… But ‘fair’ doesn’t necessarily mean the same price for everyone…

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In the article Implement Dynamic Pricing Strategy by Patrick Campbell writes: At it’s core, dynamic pricing is the concept of selling the same product at different prices to different groups of people. Technically, it’s the same as ‘price discrimination’, an illegal practice with roots in the Robinson-Patman Act of 1936… Yet, that Act has more holes than a wheel of swiss cheese, which makes any legal basis of a price discrimination lawsuit incredibly grey, especially when dealing with non-commodity goods, online.

In fact, U.S. courts and Federal Trade Commission (FTC) have repeatedly shot down dynamic price discrimination cases, unless the discrimination took place on the basis of a suspect category (i.e., gender, race, sexual orientation…). As a result, businesses have taken it upon themselves to institute dynamic pricing in two forms: Dynamic pricing based on ‘groups’: In this scenario, companies are using algorithms or just statistical splicing to offer different prices to different groups… Dynamic pricing based on ‘time’: Many people complain about this form of dynamic pricing– having a price go up-or-down based on– time of day, week, month, events, holidays…

Most consumers are accustom to one standardized price for everything, and it seems almost unfair that business can offer one price to one group of customers while charging others something different. But as retailers gain access to increasingly seductive amount of consumer data, they have ability to generate a unique price for each customer…

Some experts likened this to the pricing models seen in ancient bazaars; rather than charge everyone same price, merchants would look at patrons, size them up, and decide what to charge them on an individual basis… Today’s ecommerce retailers can do the same thing, but rather than relying on intuition, they use the sizable data trail each customer leaves behind as a result of their previous purchases…

Browsing habits, demographic characteristics, and a wealth of other relevant data points are aggregated to determine what that customer can be charged… It comes down to getting the most out of each customer interaction, and that’s what businesses that are using dynamic pricing are trying to do… According to Econsultancy; businesses who have flexible (dynamic) pricing are able to increase profits by an average of 25%… some online retailers change prices every 10 minutes based on data it collects in real-time… It’s all about the law of supply and demand…

Prices can change from one day to next, depending on– category, season, promotions, competing site… However, savvy consumers who do comparison shopping and can easily find cheapest price– for given item, at given time…

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Setting ‘price’ is challenging, particularly given many outdated ideas, misconceptions surrounding pricing structures. The problem with conventional wisdom is that it’s not always wise to follow. According to Sheri Bridges; finding the perfect price is not the ‘holy grail’… which is not to suggest that pricing is not important but that business would do better to treat price as a function of ‘value’ that is provided to customers.

In fact, value is the benefit that customers receive for dollars paid… Most customers don’t mind paying more if they get more in return (value), and benefits (value) is in mind of the customer– it may be real, or perceived…