Have consumers accepted dynamic pricing?

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Photo: Wikipedia, Franklin Heijnen
Aug 18, 2016
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By Knowledge@Wharton staff

Presented here for discussion is a summary of a current article published with permission from Knowledge@Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania.

Although dynamic pricing got negative press when ride-sharing platform Uber used it to dramatically increase prices during surge times, consumers are becoming accustomed to the practice, according to a study from Wharton professors.

The study, “The Revenue Impact of Dynamic Pricing Policies in Major League Baseball Ticket Sales,” explored the impact of dynamic pricing with one MLB club.

The paper notes that for years, professional sports organizations used arbitrary prices and relied on secondary markets to reach the right equilibrium. The arrival of sophisticated secondary markets like Stubhub caused some consternation, but now clubs are exploring dynamic pricing advantages.

“Part of that means adjusting the prices over time, some charging different prices to different people, depending on the nature of the game and so on,” said Peter Fader, marketing professor at Wharton. “[Many clubs] are finally getting smart and saying, ‘We want to take control of this. We want to set the right prices.’”

One surprise finding in the study is that a “well-chosen” static price can work better than variable pricing, although it’s a challenge to come up with the optimal price amid constantly changing factors affecting supply and demand.

“People think of dynamic pricing as an evil or a panacea,” noted Senthil Veeraraghavan, a Wharton professor of operations, information and decisions. “The truth is somewhere in the middle. You can implement the same solution and do it poorly because of how you use information.”

A primary finding, however, was that more flexible pricing holds benefits for both buyers and sellers.

Prof. Fader noted that despite the fears, MLB clubs haven’t “overreached” and no major backlashes erupted.

“From the fan side, we’re getting used to it,” said Prof. Fader. “We’re understanding that whether it’s with airplanes, professional sports, ride-sharing services, dynamic pricing is here to stay. As long as companies are doing it in a smart way and as long as they have the long run in mind and they’re not trying to squeeze as many dollars as they can right now, it really can be in everybody’s best interest.”

DISCUSSION QUESTIONS: Are consumers becoming less apprehensive about dynamic pricing? How will the practice affect retailing in the years ahead?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"The negative perception the consumer has about dynamic pricing can be managed with good communication and a “perception strategy.”"
"Let’s change the discussion, and rename 'dynamic' pricing as 'gotcha' pricing. Consumers may recognize it, but that doesn’t mean they’ll like it. "
"Retailers have employed dynamic pricing for decades. We called it other things, and it was manually done by old-fashioned gut feel."

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22 Comments on "Have consumers accepted dynamic pricing?"


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Cathy Hotka
BrainTrust

Let’s change the discussion, and rename “dynamic” pricing as “gotcha” pricing. Consumers may recognize it, but that doesn’t mean they’ll like it. Would you put up a sign in your store that says you’ll charge affluent customers more than middle-class customers? I think not.

Ori Marom
Guest

The answer depends crucially on the product category. Sport venues were traditionally reluctant to use dynamic pricing since early attempts were not popular with fans. Sports teams’ fans are very regular buyers and they like to be able to anticipate the ticket price.

In the consumer goods and the airline industry things are quite different. Indeed, customers generally do not expect such stability of prices there.

Herb Sorensen
BrainTrust

Auctions have their place …

Max Goldberg
Guest

Consumers hate dynamic pricing. Their getting used to it is solely the result of frequently facing it. No one wants to be the sap that pays more for something. Retailers pursue this strategy at their own risk.

Shep Hyken
BrainTrust

Dynamic pricing is more about the company than the customer. It’s not about supply and demand. It’s more about demand and (more) demand.

While one may perceive this statement to be negative, it really isn’t. It’s just a pricing strategy. Think of the customer who knows there will be a sale in a month and still chooses to buy at the higher price. Or a customer that missed the sale and still wants the merchandise. Or a customer that finds the item they bought last month is now on the close-out rack.

The negative perception the consumer has about dynamic pricing can be managed with good communication and a “perception strategy.”

Paula Rosenblum
BrainTrust

I think the answer really does depend on your definition of “dynamic pricing.” IF you mean changing prices mid-day, I have very little evidence that it actually happens.

If you mean charging different prices to different segments of people, everyone (consumers) hates it and no one knows what to do about it. However, eventually some retailers will start guaranteeing that they DON’T do it (think Publix … no loyalty pricing) and consumers will get their revenge.

It’s really a bad idea unless you have the equivalent of a cartel, like the airline industry.

Lee Kent
BrainTrust

There are situations that consumers are more understanding about but others, not so much. We’ve known for many years that if you want a good price on an airline ticket, you better buy it more than 14 days out. That kind of thing we get.

Having prices change on Amazon at different times of the day? That is ridiculous. And frankly, the cost of doing that must impact them in some way also.

The important thing here is transparency. As long as the retailer is honest about what they are doing and the consumer accepts the practice, the brand will do OK. Otherwise, there will be push-back.

And that’s my 2 cents.

Verlin Youd
BrainTrust

It is never wise to make a customer feel captive or regret the purchase from the outset. Dynamic pricing often poses this risk.

The only place where dynamic pricing works, using the word “works” loosely, is where consumers feel like they have very few alternatives or that the alternatives aren’t any better; think buying airline tickets. Even then, consumers make the purchase begrudgingly and are willing to spend substantial time trying to find other alternatives that offer better value, i.e. benefits of buying a Southwest ticket with no baggage fee, no change fee, no refund fee, etc.

Dynamic pricing may be a short-term benefit to the seller but has a high probability of damaging customer loyalty for the future — probably a bad idea.

Lesley Everett
Guest

Generally I believe consumers feel cheated with dynamic pricing — there’s nothing worse than buying something at one price and then seeing it much cheaper the next day. The emotional effect on the buyer will affect loyalty to that store/brand. One of the biggest issues is air travel — airline prices via an online travel booking service are frequently more expensive the next time you go in. Go in through a different browser or IP address and they will be back to where they were when you first checked. That is not a positive use of dynamic pricing — that’s just “gotcha” pricing as Cathy Hotka says!

Bob Amster
BrainTrust

Let us first differentiate between dynamic pricing, in which pricing can change depending on supply and demand or on who the buyer is, and a “Blue-Light Special” in which a sporadic promotion is published for all to enjoy for a limited (announced) time. Nobody dislikes the Blue-Light Special concept. While I would say that consumers favor a hefty amount of predictability in pricing, only time will tell how, or even if, consumers will accept the concept of dynamic pricing as a matter of fact. I have my doubts.

Ron Margulis
BrainTrust

Let’s face it, consumers only like price changes when they are reduced. So that’s the only way shoppers will accept dynamic pricing — when they see there are at least as many changes down as there are up. Actually, retailers will probably have to show more reductions to convince them it’s not solely a profit play, even if it is.

Dynamic pricing is one of the end runs for pricing, but not the only one. Market forces may very well come up with a hybrid of consumer demand — auction pricing or some barter-related approach. I imagine Jeff Bezos knows, but he’s not telling anyone.

Ross Ely
Guest

Dynamic pricing works best when consumers perceive the downward flexibility from an expected list price. It has been successful with high-value, high-margin products such as airline tickets and university educations. Consumers are trained to expect high prices for these products and are “rewarded” with lower prices when they meet certain criteria. If they don’t meet the criteria, they pay list price without the perception that the price has been increased.

Dynamic pricing works poorly with commodity products for which the list price is highly competitive. For example, consumers appear unwilling to pay more for a cold soda on a hot day vs. a cloudy day. It’s unlikely that dynamic pricing will become common with commodity-type products.

Mohamed Amer
BrainTrust
Mohamed Amer
Independent Board Member, Investor and Startup Advisor
3 years 9 months ago

Lots of different ways of defining dynamic pricing. No matter how you slice it though, we end up with one side asking how much can I get away with and the other side wondering if they were taken to the cleaners. That is not a good position to be in and is not sustainable.

Yield management has been a boon for airlines and a bane for consumers. Monopoly-like conditions remove the need for transparency and sully the brand’s relationship with its customer base.

As they consider various flavor of dynamic pricing, retailers have to tread carefully here and weigh the pros and cons and the practices of such programs — through the eyes of their customers.

Peter Charness
BrainTrust

Cathy called it like it is — “gotcha pricing.” No one likes to pay more for a product than the next person, it doesn’t feel like the retailer is treating you in a fair and equitable manner. Of course today “regular price” is probably a gotcha in most cases. I think retailers are hoping that they don’t get caught with the “high” in a high-low pricing. If they do, chances are they will never hear a complaint, never get asked for a price match and never see that shopper again. Race to the bottom. It’s so easy to check the “online fair price catalog” (also known as Amazon) and find out if you are being cheated.

Kenneth Leung
BrainTrust

Let’s narrow down the definition first of dynamic pricing to “changing prices for the same consumer in near real-time” and not “offering different prices to different segmented customers.” I think dynamic pricing works in very specific retailing situations where you have enough control of the supply, such as transportation, or if it is a pure online situation (i.e. bidding and auctioning). I can’t see the benefits marketing- or supply chain-wise to do dynamic pricing without triggering the “rip off” flag in consumers’ minds in brick-and-mortar stores.

Patricia Vekich Waldron
Staff
Patricia Vekich Waldron
Contributing Editor, RetailWire; Founder and CEO, Vision First
3 years 9 months ago

Of course consumers acknowledge dynamic pricing, but the only time they like it is when they get the lowest price!

Charles Whiteman
Guest

The only time a consumer will be happy about blatant price discrimination is when the “product” is in limited supply and they’re able to get in line ahead of others by paying a higher price.

Targeted discounting is a much less objectionable form of price discrimination … but that also has some consumer psychology ramifications that must be managed.

Ralph Jacobson
BrainTrust

Retailers have employed dynamic pricing for decades. We called it other things, and it was manually done by old-fashioned gut feel. But it has been around for a long time. 99% of shoppers are unaware of the practice. It has become a requirement to combat competition and create compelling reasons to shop your store and/or your online site.

Retailing today is a world of constant change. Businesses need to be able to quickly and intelligently react to competitors and market activity to win price-sensitive customers. With new tools available, I see dynamic pricing as a means to create a world where you can sense and respond in real-time to competitor pricing changes and market fluctuations. And, as retail channels blur, price coordination across every touchpoint becomes essential. Merchants need to use data and insight from physical stores to influence and price confidently online.

Graeme McVie
Guest
Dynamic pricing can be more or less accepted by consumers depending on a few key factors: the product that is being priced, the price determination process, the competitive situation and the communication surrounding the dynamic price. Dynamic pricing has been part of our culture for years. Look at the theatre landscape — you don’t have to look far to find the half-price ticket booths in New York’s Times Square or London’s Leicester Square. Consumers have also become accustomed to paying different prices for plane tickets and hotel rooms and, as the study notes, tickets to sporting events. What all of these “products” have in common is limited inventory and high consumption – consumers understand that if they want to guarantee a seat then buying early is advantageous whereas leaving it to the last minute has some risk. Grocery retailing however does not typically have the same characteristics as a show on Broadway so dynamic pricing is a harder concept for consumers to accept but in other areas of retail consumers have become accustomed to it.… Read more »
Craig Sundstrom
Guest

I don’t think people are any more or less accepting. Why would they be? I think they’re just unaware of it. People accept things based on whether or not they seem fair: people accept paying more for a ticket to a hot show, or less for a matinee, because they readily understand the logic behind it and if they turn to the person beside them, they will find that that person has paid a similar price. If they turn and find out the person paid a much different price because that person’s cookies results or Facebook profile showed something, or the ticket was purchased 3.2 minutes later, they will be much less understanding … and no amount of rationalization is likely to make them happy about it.

Ken Morris
BrainTrust
Ken Morris
Retail industry thought leader
3 years 9 months ago

Dynamic pricing is a way of life. We accept it without question from the airline and hotel industries and we will come to accept it going forward in other segments of retail. We have always varied pricing by company, division, zone and store and the next generation is by customer and context. Real-time retail in eCommerce, mobile and at the store level has created this opportunity and retailers and consumers are already embracing the technique. This is simply the evolution of pricing.

Cheryl Sullivan
Guest

Dynamic pricing is here to stay and even the consumers are beginning to recognize it. Dynamic pricing is nothing more than high-frequency automated pricing (using machine-learning science) that comes with some guardrails to come up with the “win/win” price for both the retailer and the consumers based upon the consumers’ price sensitivity and the price they are willing pay. Done right it also takes into consideration the retailer’s competitors’ price elasticity and factors in how they will respond — which doesn’t mean matching the competitive price. Dynamic pricing means meeting customer expectations with regards to the optimal price when and where they want — at any point in the journey — while also meeting the retailer’s strategic and financial goals.  Yes, it’s possible. Our customers are doing it very successfully!

wpDiscuz
Braintrust
"The negative perception the consumer has about dynamic pricing can be managed with good communication and a “perception strategy.”"
"Let’s change the discussion, and rename 'dynamic' pricing as 'gotcha' pricing. Consumers may recognize it, but that doesn’t mean they’ll like it. "
"Retailers have employed dynamic pricing for decades. We called it other things, and it was manually done by old-fashioned gut feel."

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