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Arnab Sinha, BCG’s global topic leader for revenue management, believes the backlash around dynamic pricing is growing as “more frequent and less predictable” price changes across varied goods and services make it harder for customers to see the benefits.
“A company’s ability to use dynamic pricing depends on how customers perceive the price changes,” Sinha said in a blog entry. “Do customers think the company is just trying to make an extra dollar for itself, or are the price changes tied to something they can see, feel, or experience as a benefit?”
He noted that dynamic pricing is a common practice in buying airline tickets and hotel bookings as well as in using ride-sharing apps. Examples of obvious benefits from the practice that consumers readily recognize include lower prices on off-season travel, senior citizen discounts, and grocery items reduced at the end of the day.
Sinha’s suggestions for companies experimenting with dynamic pricing include understanding customers well enough to adjust prices to “each customer’s perception of value,” creating a “compelling story about fairness and value” of the practice with the benefits clearly spelled out, and avoiding over-relying on data science and algorithms.
Dynamic pricing endured a heap of negative coverage in recent years, starting in 2022 when tickets to Bruce Springsteen and Taylor Swift ended up costing fans thousands of dollars as Ticketmaster’s algorithms adjusted prices to demand far outstripping supply.
Earlier this year, JetBlue caught flack for charging baggage-checking fees based on the day of departure. Wendy’s this past February received major backlash as plans to experiment with dynamic pricing led to speculation that prices would surge during peak times. The fast-food chain later clarified that prices would only be discounted during slower times.
At retail, Amazon already has a reputation for continually fluctuating prices based on demand, but dynamic pricing has the potential to extend to physical stores. Sens. Bob Casey, D-PA, and Elizabeth Warren, D-MA, wrote a letter earlier this month to Kroger CEO Rodney McMullen expressing concerns over electronic shelving labels (ESLs) enabling "dynamic price gouging."
A quarter of Americans say they would only spend money at a business that uses dynamic pricing when prices are down, according to a recent NerdWallet survey.
Explaining the benefits of dynamic pricing without sparking fears over surge pricing appears to be a primary hurdle.
In a Wall Street Journal column, Spencer Jakab, editor of Heard on the Street, suggested Wendy’s could have rolled out a “Happy Hour” or an “Early Bird Special” to demonstrate the potential of dynamic pricing to deliver savings.
In a column for Harvard Business Review, Marco Bertini, a marketing professor at Barcelona’s Ramon Llull University, said consumers need to understand how dynamic pricing can be “mutually beneficial.” He urges firms to help customers “game your system,” offering incentives or nudging them to capitalize on the benefits of lower prices — as well as shorter lines and faster service — during non-peak time periods or slower weather-related times.
The phrase “dynamic pricing,” he added, “conjures up images of algorithms directing our lives beyond our control,” and different terminology may reduce the emphasis on upward price changes. He wrote, “If a company frames the different periods of higher or lower prices as separate offerings — each with different benefits and a different value proposition — customers will feel more empowered to make better choices and adjust their behavior.”
McKinsey said prices lowered as a result of dynamic pricing should be called out or advertised, but any upward price adjustments shouldn’t be dramatic based on the category. McKinsey wrote, “Consumers expect airfares to change constantly, but they expect the price of a jar of pasta sauce or a bottle of shampoo to stay fairly consistent.”