Even if you can't define dynamic pricing, you've probably encountered it. Think of it as airline-style pricing, where the cost of a flight typically varies by all sorts of things: from how far in advance you buy the ticket to whether your flight is on a Tuesday or a Friday.
Nothing, however, seems more consumer unfriendly than the growing use of dynamic pricing in retail. Thanks to dynamic pricing, it's common practice for prices on everything from appliances to apparel to change online throughout the day. And it may soon happen in stores.
Let's look at what's happening online first. According to the Financial Times, high-speed trading tools pioneered in the stock market are increasingly driving price movements on Amazon as sellers use them to undercut and outwit each other. Prices change as often as every 15 minutes as some of the two million sellers on the site join the online retailer in using computerized tools, often developed by former data miners at banks.
Think of it as robo-pricing. With third-party software, Amazon sellers can set pricing rules -- for instance, that their prices are always $1 less than their competitors. Last month, retailers on Amazon changed prices on a Samsung 43-inch television four times over the course of a day, between $398 and $424. But it doesn't stop there.
Using sophisticated software that combines the data they already hold on customers along with location and other cookie data stored on people's browsers, retailers can detect price-sensitivity and adapt content in real-time. Such 'price-customization' software uses sophisticated algorithms to identify, for example, when a user may be willing to pay more, or whether they are likely to need an additional pricing incentive to buy.
It's an interesting strategy. But who wins? The retailer? The consumer? Investors? Here's my best guess: Pharmaceutical companies that manufacturer drugs for anxiety. Won't this skittish pricing strategy make already nervous consumers even more anxious?
To buy or not to buy, now or in 15 minutes?
Now imagine this same fluctuation in pricing coming to a brick-and-mortar store near you. Sahir Anand, vice president and research group director at Aberdeen Group, told Direct Marketing News that about one in four retailers already has "the big data know-how and analytical chops to successfully (read: profitably) execute a full-fledged dynamic pricing strategy."
Over the next few years, more retail pricing strategists are expected to take advantage of mobile connected devices -- smartphones -- to tap a wealth of location, historical, and demographic information. Many grocery stores are already doing just that, using customers' phones or mobile promotional push tools to offer customized on-screen promotions. So what's the problem? Why is it a bad move to offer a customer an instant 75-cent coupon on microwave popcorn?
Because instant gratification is rarely as good as a solid, long-term commitment. As Jason Compton noted in that Direct Marketing News article, "Short-term promotions have always carried the risk of undermining long-term strategic positions, and nothing is quite so short term as a price change made by the second."
Consumers may think robo-pricing or personalized prices are fun at first. Heck, who doesn't want to save a buck? But think about it. Once they catch on that the price of something they want to buy could fall later in the day, they may decide not to buy anything at all. Would you?
Join in on this latest Point/Counterpoint debate by adding your opinions on and experiences with dynamic pricing on the message board below.
Challenges of dynamic pricing in sports are many. First, it is a long term strategy, where probably 60+% of games are sold below "list". You must be diligent in selling inventory below list, where potential increases in volume will make up for the decrease in revenue per ticket. Most dynamic pricing teams have struggled with this.
Second, most teams implement a floor on how low they'll let ticket prices float in an attempt to protect season ticket holder value. In many cases, teams still cannot compete with secondary market pricing.
Third, unlike airlines, where the ability to add value to other areas of the experience is nill, sports teams have multiple areas and ways where they can reward fans and add value to the game experience without deeply discounting prices.
TinyM writes not long after our converstation began about variable pricing I experienced the frustration it brings. I was shopping on Amazon.com and a few other sites for a nicer camera. I found that the current rate was about $70 less than the advertised full price. I watched these few sites for a few days hoping to see a drop. The price increased to the regular price and I removed the item from my cart. I hoped to find an after Christmas deal but didn't get one.
But at least the price apparently stayed firm for "a few days". I would think one's frustration and stress level would soar if the price were swinging up and down within hours or even minutes.
Otherwise, things do go on sale for short periods of time (e.g., a week or so) and you need to snap 'em up if that's what you want. But I wouldn't really call that "dynamic pricing".
@Sandra not long after our converstation began about variable pricing I experienced the frustration it brings. I was shopping on Amazon.com and a few other sites for a nicer camera. I found that the current rate was about $70 less than the advertised full price. I watched these few sites for a few days hoping to see a drop. The price increased to the regular price and I removed the item from my cart. I hoped to find an after Christmas deal but didn't get one.
Sport event tickets are a good example, mnorth. The incentive is certainly a good match. Sports teams are still recouping from investment in stadiums over the last several years, but are now competing against a number of ways fans can see their game wihtout being in the seats. Dropping a price to reflect poor weather is a good incentive, but time will tell if the juice was worth the squeeze - if such measures draw fans significantly.
@tinym, I've definitely seen people travel for lower cost gas. And yes, at some point there are diminishing returns. I feel the same decision making will be done on dynamic pricing. Either you'll build your shoppng around the price changes or you won't. Happens all the time with all sorts of goods and services today.
MNorth writes Recently I've noticed professional sports teams doing dynamic pricing with tickets to games. Beth recently posted on the Pittsburgh Pirates using analytics, and dynamic ticket pricing is part of their strategy. If the weather's looking bad for a game, ticket prices go down. If the team goes on a seven game winning tear, ticket prices go up. Star player goes down with an injury...you get the idea. I'm not sure if I like it or not yet, I guess time will tell.
Too bad if you've budgeted $100 for a seat and ... whoops, it's $200! Oh, wait, it's $75 ... No, it's $225! No, wait...
I guess this would work for those who (1) would attend the game at any price (why didn't they just buy a season ticket?), and (2) impulse buyers...
Recently I've noticed professional sports teams doing dynamic pricing with tickets to games. Beth recently posted on the Pittsburgh Pirates using analytics, and dynamic ticket pricing is part of their strategy. If the weather's looking bad for a game, ticket prices go down. If the team goes on a seven game winning tear, ticket prices go up. Star player goes down with an injury...you get the idea. I'm not sure if I like it or not yet, I guess time will tell.
Noreen it really is creating almost a hyper pricing scenario, what will be the price and is it worth it you make the leap. Some of the credit cards are offering price insurance on purchases to encourage consumers to shop and be assured the lowest price within 30 days regardless of where they purchased. I am just not sure that they could possible find every price for every product but it is an option.
Noreen writes According to the Financial Times, high-speed trading tools pioneered in the stock market are increasingly driving price movements on Amazon as sellers use them to undercut and outwit each other. Prices change as often as every 15 minutes as some of the two million sellers on the site join the online retailer in using computerized tools, often developed by former data miners at banks.
Highspeed algorithmic may work in stock trading, where the items and the criteria are relatively very simple. But consumers make far more complex decisions and need more time to deliberate. Oops, that deal is gone. Start deliberating all over again ... or just give up...
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