Dynamic Pricing – A Way For Retailers To Overcharge You?

Even if you don’t know it by name, you’ve probably seen dynamic pricing in action.

Say you’re browsing the internet for a new pair of shoes. After looking through a couple of e-retailers, you find a pair that you like. However, you decide not to buy it as it is too costly. The next day, if you were to visit it again, you might find that it’s cheaper or even costlier.

This, in a nutshell, is dynamic pricing.

Dynamic pricing

What Is It, And Why Is It Used?

According to Alok Gupta, the Curtis L. Carlson Schoolwide Chair in Information Management at the University of Minnesota’s Carlson School of Management, dynamic pricing is based on the principle of economics.

If there is a high demand for a certain product, retailers can get away with higher prices. It works the other way as well; if demand is low, retailers can drive sales by reducing prices.

Using this technique, retailers can—to put it succinctly—set the pricing of a product to change over time, to keep up with fluctuations in demand. Certain organizations also use the data collected over years of dynamic pricing to anticipate the right price for a new product.

Who Uses It?

American Airlines was probably the first organization to use this technique on customers, pricing tickets—as early as the 1980s—based on the ebb and flow of demand throughout the year.

This commercial airline giant used a technique called ‘yield management’ to predict demand for tickets, based on factors ranging from changes in the weather to even seemingly oblique details like baseball stats.

In the 1990s, dynamic pricing was all the rage in the travel-related industries—hotels and airlines, for the most part. Following the trends of dynamic pricing, it’s clear that the next major application was in sports in the USA—an industry that generates a whopping INR 4000 billion annually.

Dynamic Pricing and Sports In The USA

San Francisco Giants baseball stadium
photo credit: Strolic Furlan / Flickr

Professional baseball is followed in the US as religiously as cricket is in India. It’s no wonder, then, that dynamic pricing has had such a major influence on this field.

The San Francisco Giants, a Major League Baseball (MLB) team, became the first professional sports franchise to make use of dynamic pricing in 2009. During the Great Recession that happened around this time, a cut in household budgets and improvement in viewing-at-home technology meant a drop in demand for tickets.

The Giants employed the software-as-a-service (SaaS) firm QCue to implement predictive algorithms and fix ticket prices. The result was an unprecedented INR 4.7 million boost in revenue in 2010.

Here’s how it affects you.

This boost in revenue was par for the course for the SaaS firm that carried it out, who usually achieved up to a 30% boost in sales during high demand. However high these prices though, they will never fall below face value. This means that profit from dynamic pricing on ticket sales is a one-way street that benefits only the seller, not the customer—which happens to be you.

Closer to Home — Dynamic Pricing and Indian Retail

Amazon box and a cat
photo credit: Jeffrey

The biggest example of pricing driven by this technology is e-retail—both fashion and electronic everyday-use items. Every time one of the big names in Indian online shopping has a sale, it’s hard to escape discussions about how prices seem to vary by the hour.

Forums like Mouthshut and Quora are filled with rants and questions like, “It was only a 1000 bucks yesterday, how come it’s over INR 1700 today?!”

Dynamic pricing is the devil in the details here. Indian online stores have teamed up with startups that use retail pricing strategies to help them price their goods in accordance with trends in product demand.

Prices are driven up when the seller runs out of stock, or when the catalogue is incomplete, and demand is at its peak. This might be done as frequently as every half hour, and sometimes even more frequently. India’s e-retailers even monitor trends abroad to price their goods in a way that precludes losing any opportunities to raise prices.

Dealing with It

Dynamic Pricing may even have percolated into the pricing of railway tickets, but there are ways you can use this system to your advantage.

Online shopping

Shopping When the Crowd Doesn’t

Using dynamic pricing software, retailers make sure that prices are increased when the demand is at its highest point. You can beat it by shopping when others aren’t. When fewer people shop, you might snag a lower price point or two.

This isn’t always true, though, because dynamic pricing isn’t solely driven by demand. If your change in shopping routines doesn’t work, you might as well shop with the crowd and make use of seasonal discounts and sales. If this technique works for you, congratulations—you just beat dynamic pricing!

Keeping Your Shopping Cart

Sometimes, a retailer will attempt to drive sales by offering discounts on items that have been on your virtual cart for a month or so. You can use this to your advantage as well—simply pick a product you like, and proceed like you would right up to the ‘checkout’ point. Then, wait for a couple of weeks.

If you get a message from your seller saying you’ve received a discount, you’ll know that this technique just worked for you.

Secret Browser Techniques

No, this isn’t just for ‘those hacker nerd types.’ You can delete the cookies on your browser, or simply use another browser. What this does is delete the information the seller has about your buying habits; they won’t be able to price products higher on the basis of your previous visits.

Beware though; this technique can also work against you. When one store sees that you shop at their competitor’s, they might actually offer better rates. By bypassing cookies, you might lose out on these opportunities.

Raising Hell, When Necessary

When you see a huge price drop on a device you just shelled out a minor fortune for yesterday, you can take up the issue with the seller. A number of retailers have policies in place just to help out those affected by situations like this, letting you return goods within a set period of time.

They can do without the negative publicity too, so you can try complaining even if it’s a little past the date specified on the returns policy.

While dynamic pricing is a great technique that can benefit both the seller and the buyer, you need to exercise caution. When this technique simply serves to drive costs up for you, maybe it’s time to say- “No, thanks”.