From airlines to finance and virtually any other sector
From airlines to finance and virtually any other sector
Dynamic pricing is not a new concept, but it's still fascinating. It began in the airline industry back in the '80s, where prices were frequently adjusted based on variables such as demand, seasonality, and remaining seats. Its success has led to many other industries adopting this approach, including e-commerce and hospitality. However, with benefits come certain pitfalls. This article from the Financial Times (link below in comments) explores both sides of the coin but let's begin with what's good about it.
First up, the good stuff👍: Dynamic pricing = Revenue boost. An MIT study revealed this approach enhanced airline revenues by 1-4% compared to static pricing models. It optimizes margins as businesses can adjust prices based on real-time demand and customer behaviuor, leading to more control over profits. An early bird offer, for instance, is not just beneficial for customers seeking lower prices but also helps businesses project demand and plan supply. In addition to economic gains, dynamic pricing can also facilitate broader access. During low demand periods, products or services become more affordable, facilitating larger consumer reach.
However, the balance is delicate and can tip into the negatives⚖️😕. Dynamic pricing can be negatively perceived due to potential unfairness and exploitation of consumers. The practice can lead to price gouging during peak demands, causing customer backlash (see how Expedia terminated their relationship with Hopper, supposedly out of concern about unnecessarily upsetting customers through pricing and excessive product cross-selling). Communication also poses challenges, as fluctuating prices can cause consumer confusion and mistrust. In fact, the UK's Competition and Markets Authority has voiced concerns about pricing algorithm misuse that could harm competition and consumers, and 71% of music fans surveyed by YouGov were against concert surge pricing.
In conclusion, while dynamic pricing brings numerous advantages, businesses should tread carefully. It's a powerful tool, but its successful implementation depends on clear communication and preserving the trust of customers, while staying within ethical and regulatory boundaries.
🤔How would you approach dynamic pricing for your business, and how would you ensure that your customers won't be upset by the continuous price changes?
Sources
Financial Times (2023), "The rise of surge pricing: ‘It will eventually be everywhere’", viewed 16 September 2023, URL: https://www.ft.com/content/d0e3bcb5-b824-414e-bfac-4c0b4193e9f0
MIT (2018), "Dynamic pricing mechanisms for airline revenue management : theory, heuristics, and implications.", URL: https://dspace.mit.edu/handle/1721.1/122707
YouGov (2023), "Consumer view – Dynamic pricing more acceptable if money goes to artist and cuts out re-sellers", viewed 16 September 2023, URL: https://business.yougov.com/content/8015-consumer-view-dynamic-pricing-more-acceptable-if-money-goes-to-artist-and-cuts-out-re-sellers
Skift (2023),"Expedia Terminates Its Hopper Relationship, Says It ‘Exploits Consumer Anxiety’, viewed 16 September 2023, URL: https://skift.com/2023/07/12/exclusive-expedia-terminates-its-hopper-relationship-says-it-exploits-consumer-anxiety/