In days gone by a market trader who knew their customers well might offer an occasional discount or even hike a price for a customer they knew could pay. Perhaps they would suggest a lower price to a customer they knew would go elsewhere or charge more to one who was ready to buy. They might lower the price of apples if they had more to sell one day or match the price of their competitor to keep their own customers loyal.
These days we do a lot more shopping via impersonal chain retailers and so the practice largely died out. Only now it’s coming back but with algorithmic support.
Instead of a chirpy shopkeeper who varies the price based on local knowledge, it’s a fabulously smart computer system that recognises and responds to our personal shopping history but also factors in trends from across the full range of customers and competitors.
That can mean different customers being offered different prices at different times as the program seeks to ensure a sale goes through.
Piers Moore-Ede, head of digital for the fintech start-up Business Expert, explains: “Dynamic pricing or price discrimination is a system used both on and offline now where retailers will adjust their pricing based on how much they calculate they can get from a particular demographic. In some cases, this is done via the postcode where you live, the time of day, the current level of demand, or if you’ve researched a product before which indicates interest.”
And it is becoming far more widespread. Alex Cook, an analyst at the retail strategy consultancy Pragma, says: “Whereas dynamic pricing used to be the preserve of companies with access to the resources required to constantly monitor and update prices - for example a team of revenue managers at a global hotel chain, or a supermarket where employees are assigned to manually apply yellow stickers to products at the end of the day - technology is making it more accessible for businesses to price their products dynamically.
“This can be software that small companies buy or subscribe to in order to analyse customer demand, or services provided by intermediaries such as Uber and Airbnb who analyse the vast quantities of data they handle to predict future demand.”
Many retail experts believe this type of flexible pricing is the future, so you need to make sure it works for you so you’re not left raging against the machine.
Big data, big opportunities
The chances are that you’ve already seen dynamic pricing in action, even if you haven’t realised you’re being specifically targeted by changing costs.
Perhaps you’ve viewed a flight or a holiday several times but when you finally return to book it the price has jumped. Or maybe you’ve added an item to your basket on Amazon but a week later when you go to actually click ‘buy’ the price has changed.
This kind of dynamic pricing is the result of ever increasing quantities of data giving retailers and service providers more insights into their own supply and customer desires than ever before.
They can increase the price when demand rises or supply falls, or they can fill those last seats and sell out a service by dropping the price as the deadline comes closer.
Some retailers can even work out how likely you are to make a purchase and either drop the price to give you an extra incentive to buy or hike it because they know you’re ready to pay.
Bill Grusso, CEO and co-founder of Scientific Revenue, comments: “The idea of altering prices and availability is generally a best practice in every line of business. Airlines and more generally the hospitality industry pioneered modern dynamic pricing, but dynamic pricing has been a best practice in consumer retail and entertainment for almost as long.
“And, of course, the rise of the internet and both e-commerce and apps-based-commerce has meant that prices can be set with greater accuracy at a personal level. Whether you call this ‘dynamic pricing’ or ‘personalised pricing’, the effect is the same.”
Such personalisation is legal as long as it breaks no other discrimination laws, such as changing price based on race.
At the moment this is only possible for online retailers but so-called ‘smart shelving’ means it could soon be coming to supermarkets and other shops. And customers could be forgiven for thinking that ‘smart’ means it’s out to outsmart them.
One example of a fairly blunt dynamic pricing tool is with Uber, which has an automatic surge pricing model. Just this week in the heavy snow a number of customers took to social media to complain that their journeys had cost considerably more as demand for cars surged.
However, such manipulation is not allowed by the company, which says it has safeguards in place to prevent it happening. But heavy snow or a popular night out can mean that customers are legitimately charged more.
And Katie Streeter Hurle, campaign director at the agency Threefold, says even that price increase can be positive.
“In theory, dynamic pricing should offer a fair way of selling goods in response to live market conditions. For example, whilst Uber's surge pricing increases the cost of the service for passengers, it also helps to ensure that pickup is available quickly and reliably in very busy periods.”
Prices have always changed in response to demand but many buyers will be shocked to discover exactly how rapidly that can now happen.
Yet not everyone thinks that dynamic pricing puts consumers at a disadvantage. Arne Strauss, Associate Professor of Operational Research, has worked with supermarkets on dynamic pricing. He says it’s quite the opposite.
“Dynamic pricing makes it possible to offer products or services at very low prices that otherwise would not be sustainable. Most businesses would not be able to simply reduce prices permanently across the board. The only way to offer low prices is to offer them only under certain conditions and to charge higher prices otherwise.
“In other words, without dynamic pricing, there will be more price certainty for the consumer, but also less availability of very low prices.”
However, some commentators have expressed concern that customers don’t fully understand how their purchases are being manipulated.
Alison Watson, programme leader for the BA Business at Arden University, says: “Online pricing dynamics are not as transparent as traditional bricks and mortar selling. Sometimes customers are not aware that they are being charged different prices to others, or that their buying behaviours are being tracked. Dynamic pricing is less negative for those who are less price-conscious.”
Beat the tech
Dynamic pricing is just a tool and one that can benefit shoppers with discounts as often as it can hike the prices.
There are ways to avoid it, but it is hard to know if that is likely to result in prices rising… or falling.
Streeter Hurle says: “If customers don't want to be targeted with dynamic pricing when shopping online, they can delete the cookies stored on their computer to remove any information the company has on them.
“However, as the pricing they see has been determined by complex algorithms, the new price could go up or down dependent on the segment they fall in to. For example, as a repeat customer the retailer might to reward with them with money off for their frequent shopping, or alternatively they might increase prices as they're demonstrating loyalty and are therefore might be prepared to pay more.”
This can be monitored. Moore-Ede says: “One way to check if you’re being specifically priced up is to return to the website as an unlogged in user, or using an incognito browser on your computer. This will give you a fresh view because the online store won’t be able to recognise you and connect the dots. You can also disable third party cookies on a permanent basis which will mean retailers won’t be able to track your activity.
“A clever hack to get around this on a more permanent basis is to use two separate browsers for different purposes. For example, do all your browsing on Firefox or Edge, and then purchase using Chrome. This way you can trick the retailer into thinking you’re a fresh visitor.”
Whether it is good or bad for shoppers, it is certain they will see more and more of dynamic pricing. Moore-Ede adds: “Rumour has it the technology is even entering the world of vending machines with plans afoot by one drinks manufacturer to dynamically alter their cold drinks pricing depending on how hot it gets outside! Interesting times.”
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