What Is Dynamic Pricing? | personal finance

Why is everything so expensive? Blame 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 rounded up as one of the top suspects.

What Is Dynamic Pricing?

Dynamic pricing is a pricing and profit strategy that businesses use to sell to different groups of people, a tactic that’s tied into supply and demand, with a lot of emphasis on demand.

Or put 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 runs the entertainment management program at the University of Montana College of Business.

“This is the buy early and save concept,” she says. “And dynamic pricing really isn’t much different from discounts for seniors, students, and military members. If there’s no demand, then prices will fall.”

What is increasingly different is how often dynamic pricing is being used – and it is changing the way we spend money in numerous industries.

Dynamic Pricing and Restaurants

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

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

However, don’t assume that before too long, if you walk into a crowded restaurant at noon, the price of your burger will go up $2. The technology exists – and has for awhile, but businesses are often reluctant to utilize it.

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

“A famous example in early dynamic pricing was a beverage vending machine that charged people more when it was hotter outside. People felt exploited and were furious,” Dinsmore says, referring to an experiment by Coca-Cola in the late 1990s. They ultimately ditched the idea, due to the onslaught of criticism the beverage company received.

Dynamic Pricing in Concerts and Other Forms of Entertainment

Luoma says that dynamic pricing doesn’t always mean higher prices.

Most events don’t sell out, and then often their pricing becomes drastically reduced,” Luoma says.

So if you don’t think an event of interest will be sold out, it could pay off to hold off on buying your concert or theater tickets right away. That’s a risk, but it’s a strategy some people use to get cheap sporting tickets and see other events. Luoma adds, “Don’t blame the artists for more expensive tickets as they rarely receive the increase in revenue from dynamic pricing. They’re actually making their money on merchandise being sold at the live event.”

Dynamic Pricing in Parking

It can be hard enough to find a parking space sometimes, but having to pay more for it is just the type of money stress and time anxiety you don’t need. City parking lots often raise prices when there is a concert in town or a sporting event. And parking meters sometimes jack up their prices, too, according to Shelle Santana, an assistant professor of marketing at Bentley University in Waltham, Massachusetts.

“In some cities, parking meter fees change dynamically based on the number of cars trying to park. When demand is high, prices are higher, and when demand is low, they’re lower,” she says.

Dynamic Pricing in Online Shopping

“You are seeing dynamic pricing pop up everywhere now, but particularly in online retailing,” Dinsmore says. This, too, is no surprise that an online business can adjust its prices on the fly, but Dinsmore points out that online retailers often use dynamic pricing methods on individual consumers. That is, prices will adjust not only depending on the time of the year and demand of customers but also based on your own interest in the brand. If you’re buying a lot from a brand, some online companies will do what they can to ensure you keep buying.

“I think a more widespread use of dynamic pricing is discounts, sales, and coupons. You’re already seeing this with your grocer sending you custom coupons every month featuring products they know you buy,” Dinsmore says.

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

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

Dynamic Pricing in Brick and Mortar Stores

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

If you become aware that you’re paying more at a more populous store, you can get out of paying that higher price if the store offers price matching, as Target does. Still, as a consumer, it may rub you the wrong way. That is a risk of dynamic pricing, says Kimberlee Josephson, associate professor of business administration at Lebanon Valley College in Annville, Pennsylvania.

“When done poorly, dynamic pricing can tarnish the reputation of a firm and the valuation of a brand – especially if a customer feels they have been taken advantage of,” Josephson says.

What You Can Do About Dynamic Pricing

“Dynamic pricing is meant to influence consumer behavior. However, it doesn’t take away the power of the consumer. At the end of the day, it is still up to the consumer to accept or reject the offer,” Josephson says.

But the way businesses are now pricing their merchandise and services makes it even more important to be a smart shopper. Life is too expensive to not compare shop and hunt for the best bargains, so you can live well while living cheaply. Meanwhile, if you’re a on a fixed income as a retiree, dynamic pricing can be a serious economic threat. But all is not futile. Josephson insists that nobody is powerless against dynamic pricing.

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

Still, for good or bad, dynamic pricing isn’t going away – it’s too profitable for companies to abandon it. “The reality is people will pay if they want it badly enough,” Luoma says.

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