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, Dynamic Pricing: What It Is And Why Is It Suddenly Everywhere?

Hey everyone, it’s newsletter time again.

This edition is filled with crucial information on business, commerce, and current events, which you might find particularly topical. It’s a follow-up from last month’s newsletter and unpacks the pros and cons of dynamic pricing.

Let’s start with a question…

Who was lucky enough to score Oasis tickets?

Few did, I suspect, despite spending the release day trying to breach the defences of highly stressed ticketing websites. And for those who got to a “buy tickets” page, did you end up paying the price you expected? Or did you walk away with a better understanding of “dynamic pricing” and simmering anger?

All that effort and cost to see if the Gallagher brothers can get through a show without coming to blows.

However, these “must-see” events have, to bitter effect, highlighted the insidious practice of dynamic pricing (DP). But this sales tactic is far from new. Commodities like petrol, electricity, and beach holidays have been subject to it for years. 

DP explains why the price of an Uber ride goes up considerably at pub closing time. And let’s not mention the now inflated cost of a Manchester hotel room when the Burnage brothers arrive in town next year.

The difference in the modern tech age is that as we mediate so much of our commerce via online apps and websites, the clever algorithms driving them can see higher demand and change prices “dynamically.” That’s why the cost of that concert ticket suddenly skyrockets while you’re mid-refresh? And we can expect this practice in many more sectors as they acquire the tech to do it for them.

It’s worth looking closer at this pricing model to see if it’s something we can apply (ethically) in our businesses. Before I get going, remember it’s a fine line in the consumer’s mind between paying extra for a scarce resource and cynical “price gouging”. 

I don’t think the Oasis organisation fully appreciated that.

What the Heck is Dynamic Pricing Anyway?

Wikipedia dryly defines this practice as:

“A revenue management pricing strategy in which businesses set flexible prices for products or services based on current market demands. It usually entails raising prices during periods of peak demand and lowering prices during periods of low demand.”

That’s why we see ever-changing prices based on how much people want something and how much is available.

This is economics red in tooth and claw, a free market functioning uber-rationally, as it were. You’ll also note prices can reduce as well as supersonically inflate, so dynamic pricing is not always a panacea for price-gouging capitalist evils. However, at its core, it’s a deliberate pricing strategy designed to meet business goals.

One thing’s for sure. When applied well, there’s nothing random about DP.

So, How Does This Madness Work?

In simple terms, it’s the perfect expression of supply and demand. When something’s in high demand, prices go up. When nobody wants it, prices tumble.

Remember petrol prices during the pandemic?

Add complex algorithms and monitor your data like a hawk with night vision goggles, and DP becomes a cakewalk. Businesses, especially exclusively online ones, can use this to adjust prices on the fly as and when needed to maximise their profits or offload inventory.

The difference today is that, as we saw with Oasis, we can see it happen in real-time, and maybe we feel cheated. One thing’s for sure: DP is here to stay and will grow in popularity. Damn you, Noel and Liam.

, Dynamic Pricing: What It Is And Why Is It Suddenly Everywhere?

Real-Life Examples That May Have Already Stung You

Ever notice how that flight you were researching for your trip seemed great value, but by the time you booked it, you were paying much more? Ryanair is an expert in this pricing strategy. Yes, Ryanair offers super cheap flights, but these become distressingly scarce when you need them most, like at Christmas or school holidays. Indeed, you could find better fares elsewhere.

Pricier fast food is on the way, maybe. US Burger chain Wendy’s has been experimenting with DP to see how it can be applied in its outlets. They claim it’s not to charge higher prices but to drive demand during quieter periods. Maybe that’s a good thing, but do you think it won’t ultimately nudge up prices when the big match starts on TV? No, me neither.

Fuel prices. We have been experiencing this for years, with prices going up or down based on the volatility of crude oil supply, mainly at the whim of OPEC members. Of course, technology has speeded this process up, but in the pre-internet days, a phone call or fax worked just as effectively.

Reasons To Be Dynamic

So far, my tone is rather negative, but as I’ve hinted, there can be some pro-business, pro-consumer uses of DP. Retail businesses can adjust real-time prices to clear slow-moving or time-limited inventory and derive some profits from the position. Modern predictive technology allows this to happen expediently and efficiently.

DP’s technological tools can help any business with its promotions and implement time-limited offers or periods of discounting, such as the inevitable Black Friday or Boxing Day sales.

DP can help specialist businesses allocate sales resources more simply and efficiently, attracting only buyers who can afford their unique goods or services. DP helps niche businesses apply the adage, “If you need to ask the price, you can’t afford it.”

Dynamically Terrible

If you turn the DP button to 11, expect client exasperation and confusion. We all need a modicum of predictability in our lives. If you put them on a roller coaster of wildly fluctuating prices, you’ll see their goodwill disappear like a magician’s rabbit. One minute, it’s cheap; the next, it’s not. One minute, you have a potential client; the next…

DP can quickly spin up a comms nightmare. Just like Ticketmaster, you might find your PR machine going into overdrive as you try vainly to explain to customers why prices keep changing. With these extra costs, you might be in a zero-sum game and have a severely burnt-out customer service team to boot.

Was it worth it for a few extra profit points?

And Here’s The Rub

Dynamic pricing isn’t going anywhere, and as the tech evolves, it will become more common and increasingly subtle. I expect we’ll have AI to thank for that. While DP might currently have a lousy press, businesses will come to love it, and if applied judiciously, consumers will see it as par for the course.

So the next time you notice the price of the latest games console or must-see concert ticket shoots up like Oasis in the download charts, you’ll know you’re not going mad; it’s dynamic pricing.

If you want to brainstorm how to apply some of these principles in your business, we’re here to help. We can look at your numbers and spot opportunities where even a modicum of DP might earn you a little or a lot more. Get in touch if that sounds useful.

So, there’s only one question left to answer. Did I get some Oasis tickets? Well, yes, I did, but not at the advertised price—nowhere near. I paid considerably more, but I won’t say how much for fear of being mocked.

Yes, even savvy finance types aren’t immune to the application of free market pricing. But will I enjoy the spectacle of seeing Oasis take to the stage in Heaton Park next year?

Definitely, maybe.

All the best

Adam




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