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Dynamic pricing : natural marketing evolution or threat ?

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In a recent article the Guardian recalled the story of John Wanamaker who revolutionized retail by inventing “fixed prices”. As incredible as it may seem, until 1861 prices were set according to the rule of thumb and the perception left by the customer on the salesman. If the latter felt you had money, you’d be charged more than someone else he felt would be poorer.

The “one price for all” rule seems however to vanish with on the one hand the data available on individuals enabling better, more precise segmentation and, on the other hand, advances in IT enabling real-time processing of that information.
While online advertising has largely benefited from those computational advances and has given birth to real-time bidding (a form of dynamic pricing for B2B relationships) and annoying retargeting practices, a new wave is about to hit : dynamic pricing in B2C settings.

Classical uses of dynamic pricing in B2C

The classical uses of dynamic pricing can be found in settings where the demand is likely to vary quickly : transportation and hotels are the best examples.
The price varies according to the time. In the case of an airline, the later you book you seat the more expensive it’s likely to be. The price depends mostly on the time. We call it a time-dependent pricing.
Price changes can also be less dynamic. In the retail industry prices are likely to be adjusted to adapt to competition ; supermarkets for instance are known for visiting their competitors and adjusting their prices on a daily basis. This is however a manual process.

New developments : not all customers will pay the same

Newest developments in dynamic pricing are made possible through advances in artificial intelligence and cheap computing power, making it possible to changes prices rapidly online. What has changed therefore is that at any given time several customers are likely to see different prices for one and the same item. And people are not needed anymore to adjust the prices. The machine does it.
The “one price for all” rule is dead.

Will dynamic pricing extend to brick-and-mortar retailers too?

In the Guardian article the author, Tim Adams, argues that more dynamic pricing may become feasible with electronic price tags. And indeed manual changes of prices, quick adaptations due to nearby competition, become easily feasible.
Adams reports on an experiment that poses some questions :

“A couple of years ago B&Q tested electronic price tags that display an item’s price based on who was looking at it, using data gathered from the customer’s mobile phone, in the hope, the store insisted, +of rewarding regular customers with discounts and special offers+ – rather than identifying who might pay top price for a product based on their purchasing history.”

Ethical or not?

The B&Q experiment, which apparently dates back to 2013 worked as follows :

“wifi-connected price tags will identify passing shoppers from mobile phone chips then access data from loyalty cards or past spending to reach a suitable price which will be displayed next to the item.”

This ressembles a real-time couponing system, much better than current systems which are time-lagged (coupons are either produced before the shopping trip or just after you have paid which decreases sharply their efficiency and doesn’t leverage impulsive puchasing behavior).
The real question is to know whether such systems are ethical and pose a threat in terms of equity between consumers. Apparently “British retailers are still a bit terrified that customers will be put off by changing prices” and indeed a reaction may be expected from consumers. The retail setting is different from an online purchase. In an online setting you don’t see what they other has paid; you may end up, when on the plane or in the train, realizing you paid more or less than your travel companion. But you’ll always find a reasonnable and fair explanation for it. In a brick-and-mortar setting this may be very different. How will you react if you see someone approaching the product you just took out of the shelves and the prices suddently decreases ? Will you be able to relate this to a fair treatment ?

Conclusion

Dynamic (or surge) pricing techniques have been made possible by cheap computational power and the rise of online purchases. Adjusting prices in offline contexts based on customers profiles seems however a difficult (and perhaps unethical) goal to reach.
Dynamic pricing entails a part of mystery and its mechanisms remain opaque to consumers. Exposing the reality of dynamic pricing in a store may lead to adverse effects on consumers.

Author: Pierre-Nicolas Schwab

Pierre-Nicolas est Docteur en Marketing et dirige l'agence d'études de marché IntoTheMinds. Ses domaines de prédilection sont le BigData l'e-commerce, le commerce de proximité, l'HoReCa et la logistique. Il est également chercheur en marketing à l'Université Libre de Bruxelles et sert de coach et formateur à plusieurs organisations et institutions publiques. Il peut être contacté par email, Linkedin ou par téléphone (+32 486 42 79 42)

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