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.
Now the same pricing scheme is catching on in other industries, from theme parks to professional sports and performing arts theaters.
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.