Dynamic Pricing Everywhere
Trickle down economic ideas
From the WSJ: Surge Pricing Creeps into Restaurants, Movies, Gym Class
Peter Fader and I talked about dynamic pricing in movie theaters about a month ago. Our main point: “It’s about time”.
Prices are not just a way to part consumers from their pocketbook. Prices are tools for determining who gets access to a limited resource. If there is a limited supply of something (And there is a limited supply of everything), then without prices (or if prices are set too low), we need to resort to other methods to decide who gets access. The other two options are:
Whoever is willing to wait in line the longest
Lottery
Anytime I find myself waiting in a long time my immediate thought is that someone messed up on pricing. But usually it’s not that prices are wrong, it is that prices are wrong for that particular point in time — and that for that particular company dynamic pricing would be too difficult (or more likely perceived to be too difficult. My first thought as an example was “imagine if grocery stores had higher prices during their busiest times of day”, but then why couldn’t they? Big signs that read “10% off from 9am-4pm and 7pm-9pm”? More palatable than “10% surge pricing from 4pm-7pm”. I can think of reasons why they should not do this, but I don’t think they are very good reasons).
The WSJ article gives some outrageous examples of extreme prices (bowling for $418.90, twice the normal price for the lane ($209 also seems high, but I guess I don’t bowl much)). It quotes both consumers and celebrities on how terrible it is to change prices:
“This strikes me as outrageous for a pedestrian family activity,”
“The bowling alley felt to me like the last egalitarian, fun, middle-America thing, [for dynamic pricing] to reach its tentacles into that realm felt pretty appalling.”
She said she disliked how the prices “kept changing all the time.”
She quit the platform. “Working out is hard enough, you don’t need to do a math problem to figure out if you can afford it,”
“The price was higher than expected, and it’s a huge turnoff. I worked hard to get that tee time and now it’s $90 instead of $65 or whatever.”
“The movie theater is and always has been a sacred democratic space for all,” said Elijah Wood
When people start talking about pricing as being “sacred” and “democratic”, you know you have hit a nerve. The article also quotes from CFOs (not CMOs…) on why it is all very reasonable and in the best interests of consumers:
“Simultaneously maximizing guest happiness through reasonable wait times and maximizing profitability by scaling price when the willingness to pay is there.”
“The idea of dynamic pricing is simple: classes in high demand can be sold at a premium while a class with many open spots might need a temporary price drop to drive up attendance.”
“Dynamic pricing puts YOU in total control… Dynamic pricing rates are constantly updating based on factors such as: the day of the week, the time of the day, Colorado weather, and most importantly golfer demand (or lack thereof) for specific tee times.”
Dynamic pricing helped two groups of people:
People who are price sensitive and flexible. Good dynamic pricing will raise prices at peaks times (vs no dynamic pricing), but it should also reduce prices at low demand times (vs no dynamic pricing)
People who have more money than time — it’s an ability to pay money in order to avoid paying other ways
The first group of people are generally lower income, while the second are generally higher income. Perhaps it is those in the middle - those who have time, but not flexibility, that are worse off in the new regime. And since that group would inclue most journalists, you can expect more articles demonizing the idea of changing prices.
If your company uses dynamic pricing in an industry that has historically not done it, I would love to hear about it!
Keep it simple,
Edward