What is dynamic pricing? | Personal finance

Why is everything so expensive? Blame it on dynamic pricing. Oh sure, you can blame other factors, such as inflation and supply chain problems, but if high prices were a murder victim, dynamic prices would be rounded up as a major suspect.

What is dynamic pricing?

Dynamic pricing is a price and profit strategy that companies use to sell to different groups of people, a supply and demand tactic, with a lot of emphasis on demand.

Or in other words, “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.

“This is the concept of advance purchase and savings,” he says. “And dynamic pricing isn’t that different from senior, student, and military discounts. If there is no demand, prices will go down. “

What is increasingly different is the frequency with which dynamic pricing is used, and the way we spend money in numerous industries is changing.

Dynamic prices and restaurants

Restaurants have been charging dynamic pricing for decades. Happy hour in bars is a form of dynamic pricing, letting customers know that if they enter a less crowded and busy time, they will 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 has a “kids eat free” program, this is an example of dynamic pricing. For the most part, restaurants didn’t have very dynamic pricing on their menus. For example, Subway got that $ 5 deal for years ago. No matter what time of day, you could get on a subway and get a $ 5 foot length.

But that kind of price could ultimately be a relic of the past. According to publications such as 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 digital menu industry. Pricing on digital menus, after all, can be changed instantly and easily, creating the perfect recipe for dynamic pricing. Eventually, it may become commonplace for restaurants to raise or lower prices by the hour or by the minute, depending on how crowded the venue is.

However, don’t assume that before long, if you walk into a busy restaurant at noon, the price of your burger will increase by $ 2. The technology has been around and has been around for a while, but companies are often reluctant to use it.

“Dynamic pricing is really tricky because when people find they are being charged more than someone else, they understandably get angry,” says John Dinsmore, a marketing professor at Wright State University in Dayton, Ohio, who has researched pricing.

“A famous example of early dynamic pricing was a vending machine for drinks that made people pay more when it was warmer outside. People felt exploited and were furious, “says Dinsmore, referring to a Coca-Cola experiment in the late 1990s. They eventually abandoned the idea, due to the onslaught of criticism from the beverage company.

Dynamic pricing in concerts and other forms of entertainment

Luoma states that dynamic prices don’t always mean higher prices.

Most events don’t run out and often their prices drop dramatically, ”says Luoma.

So, if you don’t think an event of interest will be sold out, it might be useful to postpone buying tickets for the concert or theater right away. This is a risk, but it is a strategy some people use to get cheap sports tickets and see other events. Luoma adds: “Don’t blame the artists for the more expensive tickets as they rarely get the revenue boost from dynamic pricing. They are actually making their money on the merchandise sold at the live event. “

Dynamic prices in the car park

Sometimes it can be difficult enough to find a parking space, but having to pay more is just the kind of money stress and long time anxiety that you don’t need. City car parks often increase prices when there is a concert in the city or a sporting event. And even parking meters sometimes raise prices, according to Shelle Santana, an assistant professor of marketing at Bentley University in Waltham, Massachusetts.

“In some cities, parking meter rates change dynamically based on the number of cars attempting to park. When the demand is high, the prices are higher and when the demand is low, they are lower, ”she says.

Dynamic prices in online purchases

“You are now seeing dynamic pricing appearing everywhere, but particularly in online retail,” says Dinsmore. Again, unsurprisingly, an online business can adjust its prices on the fly, but Dinsmore points out that online retailers often use dynamic pricing methods on individual consumers. That is, prices will adjust not only based on the time of year and customer demand, but also based on your interest in the brand. If you’re buying a lot from one brand, some online companies will go out of their way to make sure you keep shopping.

“I think a more common use of dynamic pricing is discounts, sales and coupons. You’re already seeing 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 focused on consumer psychology.

“For example, if you sell a $ 50 product, some customers may respond to a ‘$ 5 off’ coupon while others prefer a ‘10% off’ coupon. It’s the same discount, but people respond differently. Over time, your business will have the click data to know the exact words, phrases and images that will lead you to click, ”says Dinsmore.

Dynamic prices in brick and mortar stores

You can 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 campus store. The article quoted a freshman student who found that seven items in her cart would have been a little cheaper – $ 4.30 less – if she’d shopped at a target just 3 miles away.

If you find that you are paying more at a more populous store, you can avoid paying that higher price if the store offers price matching, as Target does. However, as a consumer, he may rub you the wrong way. This is a dynamic pricing risk, says Kimberlee Josephson, an associate professor of business administration at Lebanon Valley College in Annville, Pennsylvania.

“When done wrong, dynamic pricing can tarnish a company’s reputation and brand valuation, especially if a customer feels they’ve been exploited,” says Josephson.

What you can do for dynamic pricing

“Dynamic pricing is meant to influence consumer behavior. However, it doesn’t take away the power of the consumer. At the end of the day, it’s still up to the consumer to accept or reject the offer, ”says Josephson.

But the way companies are evaluating their products and services makes it even more important to be a smart buyer. Life is too expensive to not compare and look for the best bargains, so you can live well by living cheap. Meanwhile, if you are a retiree with a fixed income, dynamic pricing can be a serious economic threat. But all is not in vain. Josephson insists that no one is powerless against dynamic prices.

“The consumer still has the upper hand,” he says. “While consumers may want a better price, producers need to sell.”

However, for better or for worse, dynamic pricing isn’t disappearing – it’s too profitable for companies to abandon it. “The reality is that people will pay if they want it enough,” says Luoma.

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