Dynamic pricing: an old novelty
What’s dynamic pricing and how can it help your business?
Dynamic prices appear to be recent news, but they are not at all. For centuries, business owners have regulated their activities through the application of variable prices according to the availability of products and the level of demand. This is still the rule in markets across the world, from the Marrakech Souk to the London Stock Exchange.
Fixed prices, shown on the labels, are instead a modern invention. Their first concrete application occurred in fact at the end of the nineteenth century, when the first Macy’s department stores were opened in New York. Their main objective was to speed up the purchase process by increasing the number of daily transactions. To achieve this goal it was necessary to reduce any waste of time: that’s when the prices became fixed and “attached” to the product.
It was a revolution!
Today dynamic prices are tending to pick up again and be applied in ever wider sectors.
First of all there is a motivation given by technological change. Today we have two fundamental and constantly growing resources at our disposal: data and computing power. The combination of these two resources is the basis of the dynamic price revolution. The analysis of the data relating to the supply and demand of a good or service is carried out using increasingly sophisticated, powerful and effective algorithms, capable of calculating “equilibrium” prices which, as such, can be considered convenient both by who offers who from here buys.
Today, in fact, we consider it acceptable, or even correct, to pay a variable price for a service or product. For example, think of air flights: those who sit in the seat next to ours may have paid double or half of what we did. Until a few years ago, this would have even been the source of possible complaints for airlines, while in recent years we have become accustomed to the idea that booking well in advance can result in ticking a much cheaper price than a last-minute purchase minute, especially if you are in a high demand period or day.
Let’s use Uber as an example!
Its model, based on dynamic pricing, contrasts with that of traditional taxis, based on fixed prices. When there is a peak in demand, Uber’s prices rise and this convinces more drivers to head to the point where the peak is recorded, since with the higher price the profit will be greater. This incentive does not exist with a fixed price model such as that of taxis and this explains why taxis are often not found (or do not go) where they are needed. The equilibrium price can only be dynamic in the presence of variable supply and demand. Since the concept of equilibrium is usually associated with a positive value, we can say that dynamic prices calculated thanks to increasingly accurate algorithms are a good innovation.
In the late 1990s, the then CEO of Coca-Cola set out to apply dynamic pricing on vending machines. The project started with an experimentation phase, applying thermometers to the machines: in practice, when the temperature increased, the price of the Coke also increased, while when the temperatures were cooler the price tended to decrease, down to a minimum. The principle is that of the equilibrium price, but the result was a disaster.
It was not yet in the era of social media, but the web was already widespread and the reaction on the various forums was negative. There were those who accused Coca-Cola of wanting to exploit their customers and those who even brought up climate discrimination, accusing Coca-Cola of penalizing African customers and of incentivizing those in northern Europe. The coup de grace was given by the competitor of all time, Pepsi, who rode the wave raising the dose of exploitation accusations through an ad hoc communication campaign.
Probably things would be different today…