What is dynamic pricing? | personal finance

Why is everything so expensive? Blame the dynamic pricing. Oh, sure, you can blame other factors, like inflation and supply chain issues, but if high prices were a murder victim, dynamic pricing would be arrested as a prime suspect.

What is dynamic pricing?

Dynamic pricing is a pricing and profit strategy that companies use to sell to different groups of people, a tactic tied to supply and demand, with demand being a strong priority.

To put it another way, “Dynamic pricing is a computer algorithm that balances supply and demand in response to what people are willing to pay,” says Andrea Luoma, who directs the entertainment management program at the University of Montana College of Business.

“That’s the concept of buying early and saving,” she says. “And the dynamic pricing isn’t really that different from discounts for seniors, students, and military members. If there is no demand, prices will fall.”

What’s increasingly changing is the frequency of dynamic pricing – and it’s changing the way we spend money across multiple industries.

Dynamic pricing and restaurants

Restaurants have practiced dynamic pricing for decades. Happy hours in bars are a form of dynamic pricing — letting customers know they’ll be rewarded with cheaper drinks if they come at a less crowded and less demanding time. If you’ve ever taken your child to a restaurant on a quiet Tuesday night because the restaurant has a “kids eat free” program, that’s an example of dynamic pricing. For the most part, restaurants haven’t done all that much dynamic pricing on their menus. For example, Subway had this 5-foot deal years ago. No matter what time of day, you could hop on a subway and get a $5 foot long.

But that kind of pricing could eventually be a relic of the past. According to publications like RestaurantBusinessOnline.com, many restaurant chains are debating whether to use dynamic prices more regularly thanks to the growing popularity of digital menus in the industry. Finally, prices on digital menus can be changed instantly and easily, which is the perfect dynamic pricing recipe. Eventually, it could become commonplace for restaurants to raise or lower prices by the hour or by the minute, depending on how crowded the place is.

However, don’t assume that going to a crowded restaurant at lunchtime will add $2 to the price of your burger any time soon. The technology exists – and has for some time – but companies are often hesitant to embrace it.

“Dynamic pricing is really tricky because when people find out they’re being charged more than someone else, they’re understandably upset,” says John Dinsmore, a professor of marketing at Wright State University in Dayton, Ohio, who has done pricing research.

“A famous example of early dynamic pricing was a vending machine that cost more when it was hotter outside. People felt exploited and angry,” says Dinsmore, referring to an experiment by Coca-Cola in the late 1990s. They eventually scrapped the idea due to the onslaught of criticism the beverage maker received.

Dynamic pricing at concerts and other forms of entertainment

According to Luoma, dynamic pricing doesn’t always mean higher prices.

Most events don’t sell out, and then prices are often drastically reduced,” says Luoma.

So if you think an event of interest isn’t going to sell out, it might be worth holding off before buying your concert or theater tickets right away. That’s a risk, but it’s a strategy some people use to get there cheap sports tickets and see other events. Luoma adds, “Don’t blame the artists for more expensive tickets as they rarely get the revenue boost from dynamic pricing. They actually make their money from merchandise sold at the live event.”

Dynamic parking pricing

Finding parking can be difficult enough at times, but having to pay extra for it is just the kind of thing money stress and fear of time that you don’t need. City parking lots often increase prices when there is a concert or sporting event in the city. And parking meters sometimes increase their prices, too, says Shelle Santana, an assistant professor of marketing at Bentley University in Waltham, Massachusetts.

“In some cities, parking meter fees change dynamically based on how many cars are trying to park. Prices are higher when demand is high and lower when demand is low,” she says.

Dynamic pricing in online shopping

“You’re seeing dynamic pricing pop up everywhere now, but especially in online retail,” says Dinsmore. Again, it’s no surprise that an online business can adjust its prices on the fly, but Dinsmore points out that online retailers often employ dynamic pricing methods for individual consumers. That means the prices are not only adjusted according to the season and customer demand, but also based on your own interest in the brand. If you buy a lot from one brand, some online businesses will do everything they can to make sure you keep buying.

“I think a more common use of dynamic pricing is in discounts, sales, and coupons. You’re already seeing this with your grocer, who sends you customized coupons each month featuring products they know you’re buying,” says Dinsmore.

He says online retailers are using similar tactics, much of which are centered around it consumer psychology.

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

Dynamic pricing in brick-and-mortar stores

You can even find price differences in a retail chain – in the same community. The Daily Texas, the University of Texas newspaper, recently reported on Target’s “dynamic pricing” at an on-campus store. The article quoted a freshman who found that seven items in her shopping cart would have been slightly cheaper – $4.30 less – if she had shopped at Target just 3 miles away.

If you find yourself paying more at a more populous store, you can avoid that higher price if the store offers a price match like Target does. However, as a consumer, it can rub you in the wrong direction. That’s a risk of dynamic pricing, says Kimberlee Josephson, an associate professor of business administration at Lebanon Valley College in Annville, Pennsylvania.

“Dynamic pricing, when done poorly, can hurt a company’s reputation and brand valuation—especially when a customer feels they’ve been taken advantage of,” says Josephson.

What you can do about dynamic pricing

“Dynamic pricing is designed to influence consumer behavior. However, it does not take away the power from the consumer. At the end of the day, it’s still up to the consumer to accept or decline the offer,” says Josephson.

But the way companies now price their goods and services makes it even more important to be a smart shopper. Life is too expensive not to compare and look for the best bargains so you can live well live cheaply. In the meantime, if you’re a on a fixed income as a pensioner, dynamic pricing can pose a serious economic threat. But everything is not in vain. Josephson insists that no one is powerless against dynamic pricing.

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

Still, for better or worse, dynamic pricing isn’t going away – it’s too profitable for businesses to give up. “The reality is, if they want it bad enough, people will pay,” says Luoma.

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